The dynamics of multinational capital structure and macroeconomic conditions

ABSTRACT

Using a panel data methodology on a sample of 712 multinational corporations, we model capital structure changes in a non-linear fashion and compare the speed of capital structure adjustment with that of aggregate macroeconomic issues by using three types of leverage - short-term debt, long-term debt, and total debt. It is determined, macroeconomic factors are more useful in the adjustment process of capital structure than in deciding explicit debt values. A relationship between the speed of capital structure adjustment and the rate of aggregate macroeconomic changes is found. By using a nonlinear approach in conjunction with the Monte Carlo simulation model we unravel and correct the shortcomings inherent in the conventional approach to linear static capital structure investigations. The results support the hypothesis that MNCs use more shortterm debt in their capital structure and draws some allusions from the behavioral pattern of managers in reacting to short-run contemporaneous macroeconomic changes.