- 02 Dec 2014
- Working Paper Summaries
International Trade, Multinational Activity, and Corporate Finance
This article surveys research at the intersection of international economics and corporate finance. Recent research illustrates how international trade and multinational activity are affected by the credit constraints firms face and by firms' ability to make use of internal capital markets. Differences in access to financial capital explain variation in trade participation at the country, industry, and firm level. Firms need to fund fixed and variable costs of cross-border transactions, and these transactions often tie up capital for longer periods of time than domestic transactions and involve distinct risks. Credit constraints also play a role in determining which firms choose to conduct operations in multiple countries and what kinds of activities they perform in different jurisdictions. Through their internal capital markets, multinational firms can raise funding in one location and deploy it elsewhere. Internally available financial capital gives multinationals an advantage over purely domestic firms in some circumstances. Financial considerations often shape the extent to which multinationals generate spillovers for local firms. Key concepts include: The ability to access financial capital to pay fixed and variable costs affects choices firms make regarding export entry and operations, and, as a consequence, influence aggregate trade patterns. Multinationals may use internal capital markets to pay for fixed costs, address managerial moral hazard, and exploit differences in access to capital across countries. As a result, financial frictions shape multinational decisions regarding production location, integration, and corporate governance. Closed for comment; 0 Comments.
- 01 Apr 2014
- Working Paper Summaries
Opting Out of Good Governance
New disclosure rules of the Security and Exchange Commission (SEC) require that foreign firms listed on US exchanges articulate more clearly their compliance with exchange requirements. In this paper the authors study the extent to which cross-listed firms opt out of corporate governance rules, analyzing which firms opt out of US exchange requirements and the consequences of doing so. Opting out is quite common, with 80.2 percent of cross-listed firms opting out of at least one exchange corporate governance requirement. Firms that opt out appear to adopt weaker governance practices and have fewer independent directors. The decision to opt out appears to reflect the relative costs and benefits of this governance choice. The costs of complying are likely to be higher for insiders who might enjoy certain private benefits when following weak governance practices allowed in their home country. The benefits of complying are likely to be higher for firms that are attempting to raise capital and grow. Consistent with this tradeoff, the data show that firms based in countries with weak corporate governance are less likely to comply, and those that are based in such countries and are expanding and issuing equity are more likely to comply. Opting out of US exchange requirements also has consequences for how the market values cash holdings. For firms from countries with weak governance requirements, cash within the firm is worth significantly less if the firm opts out of more US exchange requirements. Overall, the paper provides insight about the costs and benefits of complying with stringent governance rules and also sheds light on the effect of governance requirements on valuation. Key concepts include: There is considerable variation in the extent to which listed foreign firms agree to comply with the governance requirements of exchanges. The decision to opt out reflects the relative costs and benefits of doing so. Opting out of exchange requirements has consequences for how the market values cash holdings. For firms from countries with weak governance requirements, cash within the firm is worth significantly less if the firm opts out of more exchange requirements. There may be a limit in the extent to which cross-listed firms can effectively borrow the US governance environment. Closed for comment; 0 Comments.
- 29 Jun 2012
- Working Paper Summaries
Trade Credit and Taxes
Economists have extensively analyzed the effects of taxation on many aspects of corporate financial policy, including borrowing and dividend distributions. But the effects of corporate income taxes on trade credit practices have been much less understood. Research by Mihir A. Desai, C. Fritz Foley, and James R. Hines, Jr. develops the idea that trade credit allows firms to reallocate capital in response to tax differences. Using detailed data on the foreign affiliates of US multinational firms, the authors are able to observe affiliates of the same firm operating in different countries and therefore facing different corporate income tax rates. Taken together, the findings illustrate that firms use trade credit to reallocate capital from low-tax jurisdictions to high tax jurisdictions to capitalize on tax-induced differences in pretax marginal products of capital. Their actions imply that tax rate differences across countries significantly affect capital allocation within firms, depressing investment levels in high tax jurisdictions and introducing differences between the productivity of capital deployed in different locations. Key concepts include: This paper examines the extent to which taxation influences trade credit practices by affecting returns to investment. Analysis of detailed foreign-affiliate-level data suggests that tax effects are large and statistically significant in explaining trade credit choices. Affiliates in low tax jurisdictions have higher net working capital positions than do other affiliates. Managers have incentives to set accounts receivable and accounts payable in a manner that reallocates capital from lightly taxed operations where investment opportunities have dissipated to highly taxed operations where profitable opportunities remain. This mechanism implies that net working capital positions, or the difference between accounts receivable and accounts payable, should be higher for firms facing lower tax rates. Closed for comment; 0 Comments.
- 14 Sep 2011
- Working Paper Summaries
Ethnic Innovation and US Multinational Firm Activity
What effects do immigrant scientists and engineers have on the global activities of the firms that employ them? To what extent do these high-skilled immigrants help US multinationals capitalize on foreign opportunities? Professors Foley and Kerr analyze key data concerning US patents, direct investment abroad, research and development, and the ownership structure of firms. They show that immigration enhances the competitiveness of US multinationals. Taken together, the results have implications for immigration policies. Many debates about immigration focus on the potentially deleterious impact of low wage immigrants on the domestic workforce. However, Foley and Kerr point out that immigrants who are skilled enough to engage in innovative activity generate benefits for firms that are seeking to do business abroad. Key concepts include: Immigrant scientists and engineers enhance the competitiveness of U.S. multinational firms in their home countries. The input of ethnic innovators makes the input of local partners less valuable and lowers entry barriers to foreign countries. U.S. multinationals are more likely to enter foreign countries with wholly-owned subsidiaries, as opposed to partially-owned ones, with the domestic support of immigrant scientists and engineers. Firms with more innovative activity performed by inventors of a certain ethnicity are more likely to conduct R&D and patenting in countries associated with that ethnicity. There is a particularly sharp rise in collaborative R&D that utilizes inventor teams spanning the United States and foreign countries. Closed for comment; 0 Comments.
- 03 Aug 2011
- Working Paper Summaries
Tax Policy and the Efficiency of US Direct Investment Abroad
The tax policy toward multinational firms has come under increased scrutiny with the rise of global activities of firms and concerns that these activities displace activities at home. This scrutiny has raised the question of whether current tax policy inefficiently subsidizes the foreign activities of firms. Mihir A. Desai, C. Fritz Foley, and James R. Hines, Jr. consider this claim by applying the theory of dynamic efficiency to the activities of multinational firms. Specifically, by comparing direct investment abroad with repatriated investment returns over the last sixty years, they conclude that firms are not investing to dynamically inefficient levels, suggesting that current tax policy is not an inefficient subsidy. Key concepts include: U.S. direct investment abroad generated cash flows greater than investment deployed by more than $1 trillion for equity investments from 1982-2010 annually, and $2 trillion for equity and debt investments from 1950-2010. The data suggest that US foreign investment is dynamically efficient. Closed for comment; 0 Comments.
- 15 Jul 2011
- Working Paper Summaries
Poultry in Motion: A Study of International Trade Finance Practices
When engaging in international trade, exporters must decide which financing terms to use in their transactions. Should they ask the importers to pay for goods before they are loaded for shipment, ask them to pay after the goods have arrived at their destination, or should they use some form of bank intermediation like a letter of credit? In this paper, Pol Antràs and C. Fritz Foley investigate this question by analyzing detailed data on the activities of a single US-based firm that exports frozen and refrigerated food products, primarily poultry. The data cover roughly $7 billion in sales to more than 140 countries over the 1996-2009 period and contain comprehensive information on the financing terms used in each transaction. Key concepts include: Firms that are likely to have the highest costs of obtaining external capital tend to be the ones that need it most. Importers are more likely to transact on cash in advance terms when they are based in countries with weak institutions, and external capital also tends to be particularly expensive in these countries. Firms in weak institutional environments are able to overcome the constraints of such environments if they can establish a relationship with their trading partners. As a relationship develops between trading partners, concerns about weak institutions seem to subside, and transactions are more likely to occur on terms that allow payment after goods have arrived. The manner in which trade is financed shapes the impact of macroeconomic and financial crises such as the recent one. For instance, the data show that importers who were transacting on cash in advance terms before the recent crisis reduced their purchases the most. Closed for comment; 0 Comments.
- 09 Jun 2010
- Working Paper Summaries
Agency Costs, Mispricing, and Ownership Structure
Under what circumstances do firms access capital markets when the potential for agency costs is high? The prevailing view holds that controlling shareholders sell shares to outsiders only when internal capital is inadequate to fund attractive investment opportunities. While the role of market efficiency in corporate finance has attracted considerable research attention, the interaction of stock market mispricing with agency problems is not well understood. HBS doctoral graduate Sergey Chernenko and professors C. Fritz Foley and Robin Greenwood propose a new explanation—based on stock market mispricing—for why firms with a controlling shareholder raise outside equity, even when firms cannot commit not to expropriate minority shareholders. Key concepts include: Stock mispricing offsets agency costs and induces a controlling shareholder to raise capital. Higher misvaluations are required to support the creation of ownership structures that give rise to more expropriation. To the extent that agency costs are deadweight instead of distributional transfers, mispricing facilitates the creation of inefficient ownership structures. Closed for comment; 0 Comments.
- 24 Oct 2005
- Research & Ideas
IPR: Protecting Your Technology Transfers
Countries are adopting stronger intellectual property rights to entice international corporate investment. But who really benefits from IPR? Should multinationals feel secure that their secrets will be protected? A Q&A with professor C. Fritz Foley. Closed for comment; 0 Comments.
The Transformation of Microsoft
In early 2015, Microsoft CFO Amy Hood and the rest of senior leadership faced a fundamental choice. Was the company ready to invest in long-term growth at the expense of some short-term profit? Professor Fritz Foley discusses how executives thought through the tradeoffs. Open for comment; 0 Comments.