differential effects of agency costs on multinational corporations: Theory and evidence

The corporate form of business organization has associated with it potentially significant agency costs. These costs arise principally from the separation of ownership and control interests in the firm. While it is widely believed that multinational corporations (MNCs) with substantial foreign market exposure face higher agency costs than less-exposed MNCs or domestic firms, empirical evidence in support of this contention is largely absent from the literature. This dissertation uses capital market data to empirically examine the theory that multinational corporations with substantial exposure to foreign markets incur greater agency costs than less-exposed MNCs or domestic corporations. Using the agency cost perspective of common shareholders, this study tests for evidence of a differential agency cost effect for MNCs by examining the market reaction to a series of events that should tend to signal a change in the level of agency costs for all firms. If MNCs with significant foreign market exposure experience higher agency costs than less-exposed MNCs or domestic corporations, then events that tend to reduce (increase) agency costs in all firms should have greater positive (negative) wealth effects for highly exposed MNCs. An event-study methodology is used to measure the abnormal returns associated with the announcements of four separate events: (1) debt offerings; (2) equity offerings; (3) organizational restructurings; and (4) takeover defenses. The observed abnormal returns are then examined cross-sectionally to test whether various firm-specific factors (primarily degree of foreign market exposure) are influential in explaining the pattern of returns. When taken together, the results of the four event-studies and their associated cross-sectional analyses support the main hypothesis of this dissertation that multinational corporations with substantial foreign market exposure experience greater levels of agency costs than less-exposed MNCs or domestic corporations. The strength of these findings depends upon the extent to which the underlying events represent effective proxies for changes in agency costs across firms.