Equity and Debt issues choices of multinational companies

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Wafaa Bayoud – Msc International Financial Management 2017 1

MASTER THESIS

Equity and Debt issues choices of

multinational companies

Thesis for the degree Master of sciences in International Financial

Management

By Wafaa Bayoud - S2864258 Supervised by: Dr Halit Gonenc University of Groningen

Faculty of Economics & Business

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Wafaa Bayoud – Msc International Financial Management 2017 2 TABLE OF CONTENTS

1. Introduction ……….………….……… 3

2. Background Literature and hypotheses………...……. 5

2.1-Multinational companies and Equity-debt issue………... 5

2.2-Combined effect of country level factors………... 8

1- Investor protection ………... 9

2. Level of Corruption………...10

2.3-Combined effect of firm level factors………11

3. Data and Methodology……….12

3.1-Sample and variables definitions………...12

3.2- Methodology……… ………..……..18

4. Results………..………19

4.1-Summary statistics and correlation………..……..19

4.2-Regression results………..………..……..20

5. Conclusion………..…….26

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Wafaa Bayoud – Msc International Financial Management 2017 3 1. Introduction:

The fundamental insight of the internalization theory is that multinational companies (MNCs) develop a firm specific advantage overseas facing multiple market imperfections to operate efficiently in order to assure an overall performance (Rugman, 1980). The features of MNCs are translated through the information asymmetries between managers in the host and home countries, and over differing tax incentives and legal regimes around the world. Financial firm specific advantages which could be identified as the capital and the access to equity and loans are an important item in addition to the intangible firm specific advantages affecting multinational corporations’ strategy and performance (Rugman, 1980; Verbeke et al., 2009).

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theory suggests that firms use an optimal capital structure as a target balancing various costs and benefits of debt and equity such as the tax benefits of debt and the costs of financial distress (Modigliani and Miller, 1963). Following this argument, firms are more likely expected to issue equity and are less likely to issue debt. In this study, significant differences might be predicted in the issue of equity and debt between MNCs and DCs because of the difference in the institutional and legal systems across countries that influence the corporate financing choice of a companys.

Besides the firm level characteristics, there are other variables that influence the equity and debt issues’ decisions. Specially for MNC’s, the institutional and legal aspects are important regarding the capital structure as demonstrated by previous papers, (Demirguc-Kunt and Maksimovic, 1999; Booth et al., 2001; Fan et al. 2010). Other researches indicate that the country’s legal regime and financial systems impact the access to external financing, and that countries with weak legal and financial systems have access to less external financing, (La porta et al. 1997,1998; Rajan and Zingales,1995).

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of the analysis. The period investigated is from 2005 to 2015 to obtain observations by year and by country.

The main results of this study are as follows. The use of equity issue ratio to analyse the capital structure choice of MNCs and DCs is important since the major findings are statistically significant specially once the key firm and country characteristics are controlled. Equity issuances is related to period with high profitability and high market to book ratio, these results are in line with the market timing hypothesis and the pecking order theory and are consistent with the previous studies (Hovakimian et al. 2001). Also, the regression analysis supports robust evidence for most of the results, suggesting that MNC’s located in countries with low level of corruption and high corporate governance score are more internationalized and issue more equity than debt which is consistent with previous literature (La porta et al. 1997,1998; Rajan and Zingales,1995). This evidence is sustained in the presence of variables used in previous empirical studies that control for firm level characteristics such as market to book and ROA. Moreover, this provide support to the existing literature on the combined effect of firm level and country level effects on the equity and debt issues of MNCs and that the relationship between level of internationalization and the level of debt or equity depends on firm specific growth characteristics and on the country specific characteristics (Gonenc and de Haan 2014). However, the results provide little evidence on the effect of the quality of investor protection on the association between level of internationalization and equity issue.

2. Background Literature and hypotheses:

2.1- Multinational companies and Equity-debt issue:

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the company’s growth and overall performance, it is important to analyse the effect of level of internationalization on a company’s debt and equity issue choice in the presence of firm and country level variables.

In the corporate finance literature. some theories investigate the capital structure choices. Trade-off theories for example stipulate that the target capital structure should be approached in a way that the various costs and benefits of debt and equity are balanced. This balance between costs and benefits affects a firm’s performance which in turn influence its target debt ratio, its selection of securities issues and its observed debt ratios, (Hovakimian et al. 2004). The benefits concern mainly the tax shield of debt and the costs involve the different agency costs of debt and equity financing, and the costs of financial distress. Modigliani and Miller’s assumptions make capital structure significant to a firm’s value. The researchers suggest that corporations obtain a tax benefit from leverage and not from dividend payments, because the interest payments related to the debt can be deducted and hence decreases the taxability of a company, which enhances firm’s profitability.

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However, the pecking order theory states that managers are not able to pursue a strategy of target capital structure because of the asymmetric information between the company and its investors. Managers are more accessible to the information and are better-informed than the investors. This affects the firm’s corporate financing choices which prefer an internal financing, then issue of debt and lastly raise of equity, Myers and Majluf (1984). Furthermore, the pecking order theory and the market timing hypotheses suggest that companies issue equity when their market performance is high because of the related costs of adverse selection (Baker and Wurgler, 2002). Schleifer and Wolfenzon (2002) examine the influence of creditor rights on financial outcomes and Noe (1998) suggests an equilibrium model of corporate financing choice for multinational affiliates operating under different legal regimes. The capability of a company to renegotiate with creditors in the presence of financial distress is tempting for the distressed firm but decrease its incentive to avoid bankruptcy and so create an agency problem reflected in higher borrowing rates (Desai et al. 2004). In order to reduce renegotiation opportunities and so to minimize agency costs, shareholders concentrate their debt in countries that provide high investor rights, and use internal capital market in countries with low investor rights.

MNCs are more exposed to international factors than Domestic firms. These international factors such as exchange rate fluctuations and various tax systems may explain the corporate financing choice of Multinational companies, Burgman (1996). Bowe et al. (2013) argue that the corporate financing choice differ between MNCs and domestic firms. Domestic firms may choose between external sources (debt) and internal sources (equity) to sustain their growth and performance because these corporate financing sources are accessible in the same country, in contrast with MNCs.Chuhan et al. (1996), suggest that the global factors have a significant influence on the capital flows and that equity flows are more sensitive than bond flows to some global factors such as the rates of return on domestic stock markets and a country’s price earnings ratio.

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and non-debt tax shields. The author founds that MNCs had larger agency costs and non-debt tax shields than Domestic firms. High agency costs may reflect the high exposition’ risks of MNCs because of its larger size and dispersed operations. Burgman (1996) and Lee and Kwok (1988) suggest that agency costs might explain the low leverage situation for MNCs. However, Chen el al. (1997) indicates that the agency cost problem might be associated with high leverage for MNCs. Other scholars demonstrate that large MNCs are more likely to issue debt rather than equity due to sufficient internal funds in order to support the future investment opportunities, Park et el. (2012). Supporting this argument, Hovakimian et al. (2004) argue that the tendency to choose between debt issue or equity issue varies with the firm size. Butler (1999) suggests that MNCs may be able to issue more debt that DCs, due to the fact that MNCs operate in geographically diverse environment with less perfect correlated economies which is might be translated to less earning volatility and low expectation of bankruptcy.

However, Empirical findings about the issue of debt and equity for MNCs and DCs suggest that MNCs use less debt. Mansi and Reeb (2002) and Reeb et al. (2001) provide evidence that MNCs use less debt while the level of internationalization is low, and this level of debt increases as the international activity increases which indicate that the level of internationalization is associated with a lower cost of debt financing. Because domestic companies, generally, may not be affected by the global conditions and country specific factors and in order to extend the existing literature on capital structure and to bring more insight into the contradictory findings of previous studies, it is essential to test whether the level of internationalization affects the issue of debt and equity since the issue of using debt and equity is important for MNCs and DCs, the first hypothesis to be tested is:

H1: There is a significant difference in the issue of equity and debt between MNCs and DCs.

2.2- Combined effect of country level factors:

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Wafaa Bayoud – Msc International Financial Management 2017 9 influence on the impact of firm specific variables (De Jong et al., 2008). In order to bring more insight on the effect of the international level of a company on its corporate financing choice, I will test this relationship under the combined effect of country level factor (investor protection, level of corruption) and firm level factor (corporate governance score by company).

1.Investor protection:

The first combined effect to be tested is whether the presence in a country with high investor protection allow firms with high level of foreign sales to access more new equity. Scholars argue that there are essential divergences in the capability of firms to raise capital in different countries. These differences consist on legal regimes that have important impacts on the size and breadth of capital markets. La porta et al. (1996) argue that the quality of investor protection of shareholders determines the ownership concentration and that civil law countries account for high ownership concentration and poor legal protection of shareholders. This low investor protection may lead companies to have difficulties when issuing equity because minority shareholders are reluctant to expropriation by managers and concentrated owners.

Other scholars argue that countries with low investor protection where private benefits of control are greater, wealthy investor provide less equity in order to keep control of domestic firms (Giannetti, et al. 2006). Investors tend to decrease their investments or avoid any investments in countries with low investor protection because the level of investor protection impacts the division of firm’s cash flows into security benefits to all shareholders depending on their participation in the capital and private benefits hold only by the controlling shareholders. This divided interest influences the stock prices depending on the different investors classes. Investors holding private and security benefits are willing to increase their stock investment than investors who detain only security benefits which lead to a raise in the market stock price that the non-controlling shareholders would not pay because of the high price. This is translated on a decrease in the demand of outside shareholders to issue equity and hence to issue less equity.

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Wafaa Bayoud – Msc International Financial Management 2017 10 quality of the law and its enforcement. La porta et al. (2002) argue that civil law countries have a weak public equity markets due to the dominance of the Bank in the local financial system, and thus, companies in code law countries tend to finance their investments and financial operations through the use of debt rather than the issue of equity. On the other hand, companies from common law countries use more equity and long-term debt because of the high investor protection offered in those countries which result in higher security returns. To test whether this is the case, the next hypothesis is:

H2: MNCs operating in countries with high investor protection issue more equity than debt.

2. Level of Corruption:

Multinational companies use an equity mode entry via wholly-owned subsidiary or joint-ventures with a local partner to enter a new market where the local institutional rules of the game apply. These rules of the game may include the use of corruption to facilitate the local transactions of the multinational company in the host market. La porta et al. (1996) identify corruption as a “key factor shaping a country’s legal system, resource allocation and firm behaviour”. Governments use rules and regulations to control the transactions of MNCs within the host country. These institutional regulations reflect the private benefits of a country to control all the transactions from them by the use of corruption. The presence of corruption varies across countries and multinational companies face many challenges when operating in a country that legitimate corruption. Tanzi (1998) suggests that corruption is harmful to firm growth and economic development like the bad monetary policy and fiscal insolvency. However, following the rules of the game provide legitimacy to multinational corporations, and legitimacy facilitates the firm’s access to valuable resources that are necessary to the survival and profitability of MNCs. Therefore, companies’ economic choices are conditioned by social norms of acceptable behaviour, Oliver (1997).

Demirguc-Kunt and Maksimovic (1999) support that companies choose long debt financing in countries where the legal system has more integrity and used corruption as a proxy to measure this integrity. In order to test the effect of corruption on the capital structure choice of MNCs, the next hypothesis would be:

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2.3- Combined effect of firm level factors:

The second combined effect to be tested suggests that the presence of MNCs in a country with developed corporate governance practices facilitates the access to more debt and equity. The conflicts of interests between principal and agents in the corporate structure encourage MNCs to have a good corporate governance practices. These conflicts also seen as agency problems arise mainly because of two reasons: First, principal and agent have different goals and aspirations. Second, the participants are not equal regarding the information they have as to each other’s knowledge, behaviour and preferences. In the context of MNCs, the risk of agency problems is even higher than for domestic companies, this could have constrained the growth opportunities of a firm and its financing choices. The presence of corporate governance practices and hence a corporate governance score may indicate the level of asymmetric information (growth opportunities). Accordingly, the combined effect of internationalization and financing choices can differ in light of this firm level factor. Giannetti & Simonov (2006) support that domestic and foreign investors that enjoy mainly equity benefits are hesitant to invest in companies with weak corporate governance. A study of McKinsey & company (2003a,b) demonstrate that the quality of corporate governance impacts the decisions of domestic and foreign investors to invest in some companies. Thus, the weak corporate governance of a company, investors are less likely to keep their equities in this company, which would influence the corporate financing choice. In this paper, the corporate governance score is used as a proxy to measure the effect of the corporate governance system of MNC on the corporate financing decision. The next hypothesis is:

H4: Multinational companies with high corporate governance score issue more equity than debt.

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Wafaa Bayoud – Msc International Financial Management 2017 12 the civil law. Agency costs and financial distress costs are known to be higher in common law countries because of the lack of long-term relationships between firms and creditors (Borio, 1990).

3. Data and Methodology:

3.1 Sample and variables definitions

The firm-level financial data used in this study emanate from Thomson Reuters DataStream database from 2005 to 2015, and the country-level variables are identified from the papers of La porta et al. (1996). I restrict the sample to the listed firms on the stock market of the country of domiciliation. The final sample consists of 5341 observations of companies from a wide range of industries in over 35 developed and developing countries. Table 1 defines all the variables used in the analysis and their sources.

Table 1: Definitions and Data sources of firm and country level variables

Variable Definition

Equity issue Ratio

Equity issue ratio is equal to Et/(Et+Dt); Et is the Gross equity issue; Dt is the Gross debt issue Tangibility Net property, plant, and equipment /

total assets)

Firm tax Effective tax rate at the firm level _{calculated as corporate income tax /} EBIT

Non debt tax shield Depreciation and amortization / total assets,

ROA Net Income / Total assets

Inv Ratio Capital expenditures / Total assets Div Ratio Cash dividends / Total assets

Firm size Logarithm of total assets in US dollars Market to book ratio Total assets - Book value of equity +

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Wafaa Bayoud – Msc International Financial Management 2017 13 Table 1 (Continued): Definitions and Data sources of firm and country level

variables

Country level variables Description Source

Anti-Director rights Index

Index of anti-director rights: The index ranges from 0 to 6: (1) the country allows shareholders to mail their proxy vote to the firm; (2) shareholders are not required to deposit their shares prior to a general shareholders’ meeting; (3) cumulative voting or proportional representation of

minorities in the board of directors is allowed; (4) an oppressed minorities mechanism is in place; (5) the minimum percentage of share capital that entitles a shareholders to call an Extraordinary shareholders meeting is less than or equal to ten percent; (6) shareholders have pre-emptive rights that can only be waived by a

shareholder meeting.

La porta et al. (1998)

Common Law

Dummy variable equal to 1 if the country follow the common law system and 0 if the country is established in a civil law system

Treisman (2000)

Corruption index

An index ranges from 0 to 10, with larger value reflecting severe corruption in a given country

Corruption perception index,

Transparency International

In order to test the relationship between MNCs and debt-equity issues, the regression analysis is used with the estimation method of ordinary least square to test the hypotheses. The dependent variables that measure the corporate financing choice is Equity issue ratio, which is equal to gross equity issue (Et) divided by gross equity issue (Et) plus gross debt

issue (Dt). As suggested in the paper of Chuhan et al. (1996), gross debt issues are preferred

to net bond issues because gross purchases of foreign assets and the repurchases of the external obligations of the country impact net debt issues, and in order to analyse the debt and equity issues in a similar way, the gross equity issue is preferred instead of net equity issue. The ratio Et/(Et+Dt) is required to be higher than 5%, if the denominator is negative, it means

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Wafaa Bayoud – Msc International Financial Management 2017 14 is greater than 5% would not be respected. Most of the literature use the ratio of debt or leverage rather than the ratio of equity and debt issue as a proxy for capital structure, the use of equity and debt issue ratio is particularly necessary to capture the annual changes in equity issue over the sample. Table 2 presents the distribution of observations in the sample by year and differentiate between the mean equity issue, mean debt issue and mean equity issue ratio.

Table 2: Distribution of the mean equity and debt issues and the ratio equity issue Year Mean Equity _{issue (Et)} Mean Debt issue _(Dt) _{issue ratio Et/(Et+Dt)}Mean Equity

2005 1,470,773.44 55,483.42 0.49 2006 58,331.81 97,013.41 0.54 2007 5,089,473.38 239,976.61 0.53 2008 1,447,474.19 8,697,138.83 0.54 2009 654,697.44 4,824,692.39 0.59 2010 825,626.37 15,397,211.34 0.58 2011 7,388,781.63 276,618.53 0.57 2012 234,155.11 537,429.23 0.56 2013 977,196.95 472,669.19 0.62 2014 1,105,428.29 2,629,161.45 0.60 2015 622,670.76 261,175.96 0.54 Total 1,591,749.60 3,105,764.10 0.56

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Wafaa Bayoud – Msc International Financial Management 2017 15 Table 3: Mean equity issues, debt issues and the ratio equity issue for MNCs and DCs

Year MNCs DCs Mean Equity issue (Et) Mean Debt issue (Dt) Mean Equity issue ratio Et/(Et+Dt) Mean Equity issue (Et) Mean Debt issue (Dt) Mean Equity issue ratio Et/(Et+Dt) 2005 1,470,773.44 55,483.42 0.49 45,445.04 70,594.57 0.52 2006 58,331.81 97,013.41 0.54 49,527.72 42,463.34 0.56 2007 5,089,473.38 239,976.61 0.53 3,149,927.31 122,909.00 0.56 2008 1,447,474.19 8,697,138.83 0.54 264,420.92 22,392,437.30 0.53 2009 654,697.44 4,824,692.39 0.59 1,388,302.29 12,874,372.47 0.55 2010 825,626.37 15,397,211.34 0.58 2,021,143.11 41,766,930.53 0.57 2011 7,388,781.63 276,618.53 0.57 18,245,026.59 189,668.74 0.56 2012 234,155.11 537,429.23 0.56 259,843.14 805,699.73 0.57 2013 977,196.95 472,669.19 0.62 1,653,810.05 205,107.20 0.68 2014 1,105,428.29 2,629,161.45 0.60 2,652,218.19 1,305,440.32 0.57 2015 622,670.76 261,175.96 0.54 127,578.88 82,770.41 0.49 Total 1,591,749.60 3,105,764.10 0.56 2,387,879.49 7,216,020.44 0.55

A group of variables is used in this study according to theoretical grounds or because previous empirical studies suggest their relevance in the determination of financing instrument (Titman and wessels, 1988; Rajan and Zingales, 1995). The main firm-level variable is Foreign sales which measure the level of firm internationalization computed as the ratio of foreign sales to total sales. A set of variables are included in the analysis that are found to be correlated to leverage (Rajan and Zingales, 1995). These variables are

Tangibility, Firm size and profitability (ROA). Tangibility constitutes the ratio of net

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Wafaa Bayoud – Msc International Financial Management 2017 16 Furthermore, the variable Firm tax is the effective tax rate at the firm level and is calculated as the ratio of corporate income tax to income before tax and the variable Non debt

tax shield is computed as the ratio of depreciation and amortization over total assets and

empirical evidence suggests that a firm’s capital structure is influenced by many firm level characteristics such as profitability and non-debt tax shield (Titman and Wessels, 1988; Gaver and Gaver, 1993; Homaifar et al. 1994). The other variables such as investment ratio, dividend ratio and market to book ratio are computed as follow: Investment Ratio is calculated as the ratio of capital expenditures to total assets, Dividend Ratio is defined as cash dividends over total assets, and market-to-book ratio is defined as: (Total assets - Book value of equity + Market value of equity)/Total assets. To deal with the outliers, all the variables are winsorized at the bottom and top 1% of their distributions.

In order to test the influence of country specific variables, two proxies are used to measure the investor protection. The first measure is a dummy variable common law that is equal to one when a country adopts the common law system, and zero if the country follows the civil law system, La Porta et Al. (2002). The second measure is the anti-director rights index which reflects the ability of shareholders to exploit their rights within the board of the company such as the freedom to trade shares during board meeting, and the ease of voting for directors. This index classifies the countries in the sample and ranges from 1 to 6 depending on the country shareholders’ right. Anti-director rights index varies from country to country and may reflect the quality of investor protection within the country. La Porta et Al. (1998) indicate significant variation in the degree of legal protection of external investors across different countries from common and civil law, and suggest that legal systems based on common law propose investors issuing debt and equity better protection than those issued on code law leading to a higher equity values, La Porta et Al. (2002).

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Wafaa Bayoud – Msc International Financial Management 2017 17 Table 3: Distribution of the sample by countries and major variables

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Wafaa Bayoud – Msc International Financial Management 2017 18 Table 3 (Continued): Distribution of the sample by countries and major variables

Countries N Equity issue ratio Foreign Sales ratio Anti-director rights Corporate Governance score Corruption index Common law (*) New Zealand 37 0.547 0.493 0.589 3.324 8.407 1 Philippines 15 0.633 0.322 0.635 3.600 8.334 0 Poland 15 0.386 0.470 0.582 4.467 8.937 0 Portugal 2 0.537 0.824 0.723 3.500 7.950 0 Sweden 107 0.532 0.396 0.368 4.037 9.072 1 Singapore 96 0.608 0.533 0.414 3.604 8.172 1 Thailand 2 0.597 0.356 0.253 3.000 9.015 0 Turkey 6 0.510 0.397 0.379 2.500 9.000 0 Taiwan 54 0.541 0.337 0.414 4.056 9.186 0 United States 2,421 0.527 0.349 0.405 4.143 8.857 1 South Africa 23 0.664 0.267 0.372 4.522 9.079 1 Total 5,341 0.558 0.367 0.464 4.068 8.922

(*) 0 means civil law and 1 means common law

3.2 Methodology:

To investigate the impact of MNCs’ characteristics on equity and debt issues, the

following equation is estimated with Ordinary Least Squares (OLS):

Equity issue ratio it = ci +b1 Foreign sales it+ b2 Firm size it+ b3 Firm tax it+ b4 Investment

ratio it + b5 Dividend ratio it + b6 Market to book it + b7 ROA it +b8 Non debt tax shield it +b9

Tangibility it + b10 Anti director rights j+ b11 common law j+ b12 Corruption index j+ b13

Corporate governance score it+ e it

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Wafaa Bayoud – Msc International Financial Management 2017 19 variables, the second regression analyses the association between equity issue and firm level internationalisation under many conditions, and the last regression is conducted as a robustness check and exclude US firms from the sample, because of the presence of a large number of US firms in the sample. These conditions are described by three interactions between foreign sales and country level variables: Foreign sales*anti director rights analyses the impact of investor protection’s quality and the effect of country’s legal system on the relation between internationalization and equity and debt financing; Foreign sales*Corruption index represents the effect of country’s corruption level on the relationship between internationalization and debt-equity financing; and Foreign sales*corporate governance score measures the influence of country’s corporate governance system on the association between the degree of internationalization and the capital structure choice. Because the variable common law is highly correlated with anti-director rights as represented in table 6, and in order to avoid multicollinearity problems, the regression analysis is conducted without common law variables for all the models.

4. Results:

4.1 Summary statistics and correlation:

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Wafaa Bayoud – Msc International Financial Management 2017 20 Table 5: Descriptive statistics

Mean Median Standard _deviation Maximum Minimum

Equity issue ratio 0.558 0.507 0.378 1.054 0.050

Foreign sales 0.367 0.258 0.371 1.000 0.000

Tangibility 0.236 0.139 0.272 0.999 0.000

ROA 0.050 0.055 0.129 0.779 -1.802

Non debt tax shield 0.115 0.026 0.556 5.605 0.000

Market to book 1.469 1.220 0.814 4.364 0.000 Invest ratio _0.052 _0.033 _0.067 _0.728 _0.000 Firm tax 0.130 0.153 0.178 0.627 -1.088 Firm size _6.497 _6.359 _0.861 _9.468 _4.372 Divid ratio 0.022 0.010 0.036 0.486 0.000 Corruption index 8.922 9.100 1.258 10.000 0.000

Corporate Gov score 0.464 0.422 0.287 0.970 0.018

Common law 0.688 1.000 0.464 1.000 0.000

Anti-director rights 4.068 5.000 1.301 5.000 0.000

Number of Observations 5,341

In order to identify the correlation between the independent variables in the sample, Table 5 presents Pearson correlation matrix. From the table the variables Tangibility and

Invest ratio are positively correlated with a coefficient of 0.401, also the variables Anti-director rights and common law are highly correlated with a coefficient of 0.815 which is true

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Wafaa Bayoud – Msc International Financial Management 2017 21 Table 6: Correlation matrix

The table provides the correlation matrix for the sample. Pearson correlation coefficients for all the variables

1 2 3 4 5 6 7 8 9 10 11 12 13 14

Equity issue ratio 1 ₁

Foreign sales 2 _0.009 ₁ Tangibility 3 _-0.264 _0.040 ₁ ROA 4 _0.138 _-0.027 _-0.058 ₁

Non debt tax shield 5 _-0.029 _-0.047 _-0.105 _0.001 ₁

Market to book 6 _-0.006 _0.181 _0.147 _0.149 _-0.012 ₁ Investment ratio 7 _-0.205 _-0.015 _0.401 _-0.079 _0.032 _0.245 ₁ Firm tax 8 _-0.012 _0.072 _0.003 _0.199 _0.140 _0.198 _0.059 ₁ Firm size 9 _0.190 _0.177 _-0.112 _0.055 _-0.096 _-0.130 _-0.218 _-0.036 ₁ Dividend ratio 10 _-0.038 _-0.042 _-0.032 _0.314 _-0.033 _0.142 _-0.027 _0.204 _-0.148 ₁ Corruption index 11 _0.038 _0.174 _0.111 _-0.090 _-0.087 _0.091 _0.062 _-0.041 _0.072 _-0.125 ₁

Corporate Gov score 12 _-0.024 _0.056 _0.169 _-0.154 _-0.069 _-0.041 _0.041 _-0.031 _0.156 _-0.097 _0.222 ₁

Common law 13 _-0.100 _-0.158 _0.191 _-0.104 _-0.207 _-0.114 _0.073 _-0.175 _-0.171 _-0.140 _0.231 _0.218 ₁

Anti-director rights 14 _0.108 _-0.157 _0.127 _-0.082 _-0.028 _-0.152 _0.029 _-0.119 _-0.135 _-0.086 _0.199 _0.206 _0.815 ₁

4.2 Regression results:

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Wafaa Bayoud – Msc International Financial Management 2017 22 not in line with the trade-off theory stipulating that profitability is positively related with debt rather than equity choice. Further, Tangibility has a negative significant coefficient in all the model which means that tangibility has significantly negative effects on equity issue and means that MNCs with low leverage reflects their possession of valuable intangible assets. This argument is in line with the work of Rajan and Zingales (1995), signalling that companies with tangible assets are easy to collateralize which lead to a decrease in the agency cost of debt. Firm size coefficients have different sign in all the first panel from table 7 and the second panel from table 8. In the first panel, size has generally negative and significant coefficients which means that larger firms are less likely to issue equity. This is not consistent with the work of Rajan and Zingales (1995) where they argue that size may represent a proxy for the information that outside investors have which might impact their preference to issue equity rather than debt. However, table 8 provides a positive siginificant coefficient for size which is in line with the argument of Rajan and Zingales (1995) stipulating that size should have a positive impact on the supply of debt.

Dividend ratio, Firm tax and investment ratio have significant negative effects in all the models in the first panel in table 7. The country level variable corruption index (0.009) has significant positive effect on equity issue and anti-director rights has significant negative effect on equity issue decision.

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Wafaa Bayoud – Msc International Financial Management 2017 23 system is equivalent to the common law system. This is not consistent with the hypothesis that firms from common law countries with high anti-director rights issue more equity than debt. Moreover, the interaction foreign sales * Corruption index have negative and significant coefficient at 1% only for model 5 implying that the combination of higher foreign sales and higher corruption index modifies the effect that corruption has on reducing the equity issue of MNC’s. This evidence is in line with Demirguc-Kunt and Maksimovic (1999)’ work supporting that firms have longer duration debt in countries where the legal system has more integrity and where equity is expected to be used less than debt. This argument is consistent with the fourth hypothesis that MNC’s operating in countries with low level of corruption issue less equity.

The last interaction foreign sales* corporate governance score has positive and significant coefficients at 1% level for the models 2, 3, 4, and 5 suggesting that firms with higher foreign sales use more equity in countries where the corporate governance score of companies are high. The corporate governance score increases the effect that firms with high foreign sales has on the increase in equity issue. This evidence confirms the prediction that firms with high corporate governance score issue more equity than debt.

The results in table 9 are almost the same as the results of previous regression which is not in line with the finding of Kwok and Reeb (2000) and Ramirez and Kwok (2010) suggesting that MNCs outside US may have a different behaviour toward leverage decisions because their internationalization contains various level of risks compared to US MNCs.

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Wafaa Bayoud – Msc International Financial Management 2017 24 Table 7: Regression analysis of equity issue on the explanatory variables

Equity issue ratio

Model 1 Model 2 Model 3 Model 4 Model 5

Constant 0.408*** 0.498*** 0.497*** 0.226*** 0.161*** (0.071) (0.071) (0.071) (0.073) (0.077) Foreign sales -0.001 -0.005 -0.005 0.013 0.007 (0.014) (0.014) (0.014) (0.014) (0.014) Tangibility -0.310*** -0.268*** -0.269*** -0.296*** -0.297*** (0.018) (0.019) (0.020) (0.020) (0.020) Market to book 0.014** 0.026*** 0.027*** 0.036*** 0.035*** (0.006) (0.006) (0.006) (0.006) (0.006) Firm size -0.067*** -0.057*** -0.057*** -0.069*** 0.068*** (0.006) (0.006) (0.006) (0.006) (0.006) ROA 0.331*** 0.384*** 0.387*** 0.381*** 0.383*** (0.039) (0.041) (0.041) (0.041) (0.041) Investment ratio -0.521*** -0.521*** -0.495*** -0.498*** (0.081) (0.081) (0.081) (0.080) Dividend ratio -0.613*** -0.610*** -0.497*** -0.468*** (0.144) (0.144) (0.142) (0.142) Firm Tax -0.072** -0.073*** -0.047*** -0.045 (0.028) (0.029) (0.028) (0.028)

Corporate Gov score 0.008 -0.038 0.044***

(0.018) (0.018) (0.018) Anti-director rights 0.048*** 0.046*** (0.004) (0.003) Corruption index 0.009*** (0.004) Adjusted R-squared 0.223 0.234 0.257 0.257 0.258 Observations 5341 5341 5341 5341 5341

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Wafaa Bayoud – Msc International Financial Management 2017 25 Table 8: Regression analysis of equity issue on the explanatory variables

Constant -0.061 0.178*** -0.061 -0.019 -0.153* (0.080) (0.077) (0.080) (0.082) (0.083) Foreign sales 0.392*** -0.079*** 0.391*** 0.681*** 0.800*** (0.050) (0.025) (0.051) (0.111) (0.112) Tangibility -0.292*** -0.301*** -0.292*** -0.296*** -0.289*** (0.019) (0.020) (0.019) (0.019) (0.019) Market to book 0.038*** 0.035*** 0.038*** 0.034*** 0.037*** (0.006) (0.006) (0.006) (0.006) (0.006) Firm size 0.079*** 0.069*** 0.079*** 0.072*** 0.080*** (0.006) (0.006) (0.006) (0.006) (0.006) Firm Tax -0.039 -0.049*** -0.039 -0.042 -0.035 (0.028) (0.028) (0.028) (0.028) (0.028) Investment ratio -0.511*** -0.510*** -0.511*** -0.535*** -0.525*** (0.079) (0.080) (0.079) (0.080) (0.079) Dividend ratio -0.370*** -0.471*** -0.370*** -0.384*** -0.329*** (0.141) (0.143) (0.141) (0.142) (0.141) ROA 0.338*** 0.371*** 0.338*** 0.367*** 0.339*** (0.041) (0.041) (0.041) (0.041) (0.041) Corporate Gov score -0.168*** -0.113*** -0.168*** -0.138*** -0.177*** (0.024) (0.025) (0.024) (0.025) (0.025) Anti-director rights 0.107*** 0.046*** 0.107*** 0.046*** 0.099*** (0.007) (0.003) (0.006) (0.003) (0.007)

Corruption index 0.001 0.011*** 0.002 0.016***

(0.004) (0.004) (0.004) (0.005)

Foreign sales*Anti-dire ri. -0.121*** -0.121*** -0.106***

(0.011) (0.011) (0.012)

Foreign sales*Corpo. Gov sc. 0.183*** 0.278*** 0.233*** 0.297***

(0.045) (0.044) (0.044) (0.044)

Foreign sales*Corruption ind. -0.086*** -0.052***

(0.012) (0.012)

Adjusted R-squared 0.277 0.261 0.277 0.268 0.280

Observations 5341 5341 5341 5341 5341

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Wafaa Bayoud – Msc International Financial Management 2017 26 Table 9: Regression analysis of equity issue ratio on the explanatory

variables

Constant 0.033 0.137 0.033 0.183* -0.075 (0.110) (0.107) (0.110) (0.100) (0.114) Foreign sales 0.262*** 0.044 0.254*** 0.367*** 0.739*** (0.065) (0.036) (0.067) (0.130) (0.155) Tangibility -0.318*** -0.321*** -0.319*** -0.314*** -0.314*** (0.028) (0.028) (0.028) (0.028) (0.028) Market to book 0.039*** 0.036*** 0.038*** 0.040*** 0.037*** (0.009) (0.008) (0.008) (0.009) (0.008) Firm size 0.075*** 0.070*** 0.075*** 0.073*** 0.074*** (0.008) (0.008) (0.008) (0.008) (0.008) Firm Tax -0.042 -0.046 -0.044 -0.043 -0.038 (0.037) (0.038) (0.037) (0.038) (0.038) Investment ratio -0.349*** -0.351*** -0.354*** -0.356*** -0.377*** (0.110) (0.111) (0.110) (0.110) (0.110) Dividend ratio -0.021 -0.023 -0.027 -0.013 -0.023 (0.193) (0.194) (0.193) (0.194) (0.194) ROA 0.280*** 0.284*** 0.280*** 0.274*** 0.278*** (0.054) (0.055) (0.055) (0.055) (0.055) Corporate Gov score 0.143*** 0.172*** -0.128*** -0.181*** -0.125*** (0.025) (0.034) (0.036) (0.033) (0.035) Anti-director rights 0.049*** 0.021*** 0.051*** 0.024*** 0.042*** (0.009) (0.006) (0.009) (0.006) (0.010)

Corruption index 0.006 0.010* 0.006 0.022***

(0.006) (0.005) (0.005) (0.007)

Foreign sales*anti dire. ri. -0.056*** -0.059*** -0.042**

(0.015) (0.015) (0.016)

Foreign sales*Corpo. Gov. sc. -0.035 0.038 -0.037 0.050

(0.060) (0.063) (0.060) (0.063)

Foreign sales*Corruption ind. -0.034** -0.061***

(0.014) (0.018) Adjusted R-squared 0.263 0.258 0.262 0.259 0.266 Observations 2920 2920 2920 2920 2920

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Wafaa Bayoud – Msc International Financial Management 2017 27 As a robustness check, table 9 presents the regression analysis of equity issue on the explanatory variables for all the countries in the sample except for US.. Non US MNCs do not exhibit a different leverage behaviour than US MNCs. The regression results present almost similar finding to those for US firms reported earlier in table 8. However, the effect of good corporate governance on the relationship between level of internationalization and equity issue is negative and no longer significant among non US firms. The results are not consistent with the arguments of kwok and Reeb (2000) and Ramirez and kwok (2010) who suggest that MNCs outside US tend to adjust their security issues frequently and exhibit a different leverage behaviour.

4. Conclusion:

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