Mobility

Creditor Rights And Debt Allocation Within Multinationals

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Executive Summary

The authors analyze the optimal debt structure of multinational corporations choosing between centralized or decentralized borrowing. They identify how this choice is affected by creditor rights and bankruptcy costs, taking into account managerial incentives and coinsurance considerations. They find that partially centralized borrowing structures are optimal with either weak or strong creditor rights. For intermediate levels of creditor rights fully decentralized (centralized) borrowing structures are optimal if managers have strong (weak) empire building tendencies. Decentralized borrowing is more attractive for companies focusing on short-term profitability. Credits are rather taken in countries with better creditor rights and more efficient insolvency systems.

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