Susan M. Albring
Syracuse University
Abstract: This paper examines how the multinational firm's choice of debt or internal funds depends upon the cost of using domestic versus foreign internal funds for additional investments. I find that my measure of total funds is negatively related to issuing incremental debt. I do not find results using a general measure of foreign funds or the firms' foreign tax credit (FTC) limitation status. However, results suggest that change in debt is positively related to a subset of foreign funds, permanently reinvested earnings, which measures financial reporting costs. Results also suggest that the magnitude of the relationship between the level of permanent reinvestment of foreign earnings and incremental debt financing is greater for firms with non-binding FTC limitations than for firms with binding FTC limitations. Overall, findings suggest that the source of internal funds makes a difference in firms' use of debt financing.
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