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1 AFIN 8008 & 7008 Assignment Instruction Due Date The due date of this assignment is 23:59 Friday 16 October 2020. Academic Honesty This is an individual assignment. Students are expected to work independently on the assignment tasks. The similarity of assignment answers will be checked in Turnitin. Any plagiarism, collusion and other dishonest behaviour will be penalized subject to the university Academic Integrity Policy. You are highly recommended: • not to share your document by any means with another student, • not to attend any private tutoring session on this assignment, and • not to use any assignment help service from a third party. The teaching team is keen to help. Please do not hesitate to contact lecturers for support. Assignment Tasks In this assignment, you will research the topic on corporate financing decisions of multinational firms and write a research report to answer the following 3 (or 4) questions: 1. Based on the capital structure theories, discuss how firms make financing decisions. In general, what are major factors to consider when making capital structure decisions? For multinational firms, what are the additional factors to consider when marking financing decisions? You can base your discussion on the research paper “The Corporate Finance of Multinational Firms”. You can download the paper from SSRN at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3535761 or from iLearn. 2. Find a real corporate financing case of a multinational firm and demonstrate how the multinational firm raise capital in practice. Discuss whether it is consistent with capital theories or not and explain why or why not. What are the obstacles (e.g., government interventions) confronting the capital raising of the multinational firm? Note: in your discussion, you should first briefly describe the case. You can use some data from corporate financial report, press release, earnings conference call and some charts to support your arguments. https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3535761 2 3. Discuss how the rise of nationalism will affect the international financial markets and corporate financing decisions of both domestic and multinational firms. 4. What will likely to be the trend post COVID-19 crisis? (Additional question for Master of Research student only.) Assignment Presentation Requirements: 1. Use Portrait orientation. 2. Use Times New Roman font, size 12 points. 3. Use 1.5 spacing. 4. Use A4 paper. 5. Maximum 1, 500 words. Tables, diagrams, and the reference list are not included in word count. You may exceed the word count by 10%. Please DO NOT attach any appendix to your assignment and DO NOT show unnecessary workings (e.g., a fully page Excel model) in your assignment. 6. Make sure to edit your assignment before submitting. The font, size, alignment, line space must be consistent throughout. Tables and diagrams should be numbered and captioned. You are expected to use tables and diagrams to summarize or emphasize findings but the information in a table/diagram must be referred to and clearly explained in-text. 7. Referencing: Make sure to acknowledge your data resources appropriately. Citations and the reference list must be prepared following Harvard style referencing. The report must contain the following: 1. Cover page - including course name, day and time of your class, title of report, student’s full name and student ID. 2. Section 1. Introduction - Provide a road map of how the essay is structured. 3. Body - Include at least 3 (or 4) sections to answer the 3 (or 4) questions that are listed in the assignment tasks. Use section headings, such as Section 2. Capital Structure determinants, Section 3. Case study, and Section 4. Future trends. 4. Section 5. Conclusion - This is not a summary, but states some of the key issues you have found from the research and why it is important to managing firms. 3 5. Bibliography Submission The assignment must be submitted via Turnitin before 23:59 Friday 16 October 2020. No extensions will be granted. There is penalty for late submission. 10%-mark deduction for each 24-hour period delay. For example, 20% penalty applies if late by 25 hours after the due date of submission. This penalty does not apply for cases in which an application for special consideration is made and approved. No submission will be accepted after solutions have been posted. Marking Criteria See iLearn site for the marking rubric. Charles A. Dice Center for Research in Financial Economics The Corporate Finance of Multinational Firms Isil Erel, The Ohio State University, NBER, and ECGI Yeejin Jang, University of New South Wales Michael S. Weisbach, The Ohio State University, NBER, and ECGI Dice Center WP 2020-001 Fisher College of Business WP 2020-03-001 February 7, 2020 This paper can be downloaded without charge from: http://www.ssrn.com/abstract=3535761 An index to the working paper in the Fisher College of Business Working Paper Series is located at: http://www.ssrn.com/link/Fisher-College-of-Business.html fisher.osu.edu Fisher College of Business Working Paper Series Electronic copy available at: https://ssrn.com/abstract=3535761 http://www.ssrn.com/abstract=3535761 http://www.ssrn.com/link/Fisher-College-of-Business.html The Corporate Finance of Multinational Firms Isil Erel Ohio State University, NBER, and ECGI Yeejin Jang University of New South Wales Michael S. Weisbach Ohio State University, NBER, and ECGI February 7, 2020 Abstract An increasing fraction of firms worldwide operate in multiple countries. We study the costs and benefits of being multinational in firms’ corporate financial decisions and survey the related academic evidence. We document that, among U.S. publicly traded firms, the prevalence of multinationals is approximately the same as domestic firms, using classification schemes relying on both income-based and a sales-based metrics. Outside the U.S., the fraction is lower but has been growing. Multinational firms are exposed to additional risks beyond those facing domestic firms coming from political factors and exchange rates. However, they are likely to benefit from diversification of cash flows and flexibility in capital sources. We show that multinational firms, indeed, have a better access to foreign capital markets and a lower cost of debt than otherwise identical domestic firms, but the evidence on the cost of equity is mixed. * We thank Fritz Foley, Jim Hines, David Wessel and participants in a presentation at Brookings for very helpful suggestions. Greg Allen, Hyeik Kim, Rick Ogden provided excellent research assistance. Electronic copy available at: https://ssrn.com/abstract=3535761 1 1. Introduction As the world economy has become more integrated, there has been an increase in the number of multinational firms. As of 2017, about half of the publicly-traded firms in the U.S. are multinationals. For the average multinational firm, foreign income (sales) represent about 40% of aggregate income (sales). The extent of international operations of multinational firms is similar for international firms in MSCI World developed countries. As the global economy becomes more integrated, the fraction of firms with foreign sales also rose rapidly in emerging markets. Given that multinational firms are such significant players in the world economy, understanding their financial policies is an important task. Operating in more than one country can affect a firm’s financial decisions in a number of ways. Most importantly, being multinational appears to affect both firms’ cost of finance and their access to capital during poor economic times. An important reason for financing advantages of multinational firms is that they have more flexibility in their potential sources of financing than domestic firms. In principle, any firm could borrow from any bank in the world or issue public equity or debt in any country. However, for a number of reasons, it is usually much more cost-effective for firms to raise capital in locations where they have operations (see Jang (2017)). Financing international activities from local capital provides a natural hedge against currency risks. Furthermore, additional choices of where to raise capital can allow a firm to better optimize over rates, and also to diversify its sources of financing, which can be valuable when financing becomes scarce in one part of the world. In addition, being multinational diversifies a firm’s cash flows across countries and minimizes the impact of country-specific shocks. Therefore, multinational firms have lower cash- Electronic copy available at: https://ssrn.com/abstract=3535761 2 flow volatility than otherwise similar domestic firms. This lower cash-flow volatility is likely to reduce a firm’s credit risk and cost of financing, and to increase its overall debt capacity. Consistent with the choice of location of borrowing and diversification across countries lowering the cost of debt, we document empirically that multinational firms pay lower spreads on their bank loans, holding other factors constant. However, the results on the cost of equity are mixed, with some studies finding that being multinational lowers the cost of equity while others find that it raises the cost of equity. While being a multinational incurs benefits through diversification of capital sources and by allowing for tax arbitrage across countries, it also entails costs. Firms operating in multiple countries face political risks that are likely to be larger than those faced by domestic companies. A multinational company is a “foreign” company in at least one country, and foreign companies are often discriminated against by regulatory authorities. Dinc and Erel (2013) provide empirical evidence on how economic nationalism, which is defined as preference for the native and against the foreigner, has both direct and indirect economic impact on acquisitions and impedes international capital flows. The authors show that governments implement national policies against foreign acquisition bids