correlated markets that should lower their business risk and financial risk (Reeb et al.,
2001). Therefore, multinational corporations (hereafter MNCs) are expected to have higher
degree of risk tolerance compared to domestic corporations (hereafter DCs).
Internationalization also allows MNCs to have greater access to global capital markets than
DCs (Reeb et al., 2001). For these reasons, MNCs should have higher capacity to sustain
higher level of long-term debt comparedto DCs (Hughes et al.,1975;Rugman, 1976).
On the empirical side, US MNCs are generally found to maintain less long-term debt than
DCs (Burgman, 1996;Chen et al., 1997;Doukas and Pantzalis, 2003;Fatemi, 1988;Lee
and Kwok, 1988), even though their debt financing cost is relatively lower (Reeb et al.,
2001). Studies find that MNCs maintain lesslong-term debt to mitigate the adverse effect of
internationalization such as increasing agency problem and business risk that outweigh the
risk-reduction benefits of international diversification. However, evidence from the non-US
developed markets is found to be mixed (Akhtar, 2005;Akhtar and Oliver, 2009;Mittoo and
Zhang, 2008;Singh and Nejadmalayeri, 2004).
To date, most of the studies on MNCs’ debt financing structure provide evidence from the
developed markets context. To what extent the reported findings and justifications are
applicable to the emerging markets context,is still relatively unexplored. Motivated by these
arguments, this study examines if the debated debt financing puzzle also extends to MNCs
in the emerging markets. Specifically, this study seeks the answer to the question, “Do
MNCs in Malaysia also use less long-term debt than DCs to mitigate costs related to the
adverse effects of internationalization?”
Malaysian firms are characterized to have high concentrated ownership and large direct
shareholdings (Claessens and Yurtoglu, 2013;Deesomsak et al.,2009). About half of the
direct shareholdings belong to the family ownership who is actively involved in the
management. Malaysian firms also have a close relation with their banks; thus, they prefer
to use bank borrowing than debt securities (Deesomsak et al.,2009). Deesomsak et al.
(2009) find that Malaysian firms are unlikely to use debt maturity as a tool to mitigate their
agency costs, but the finding does not hold when firms are recognized by their
heterogeneous characteristics (Khaw and Lee, 2016).
This study contributes to the literature as follows: first, this study sheds additional insight to
the debated debt financing puzzle from the emerging markets’ perspective. The findings
highlight the importance of recognizing firms by their international diversification, given the
systematic differences in the agency costs and business risk between MNCs and DCs.
Consistent empirical results have reported that MNCs in Malaysia sustain proportionately
lower level of long-term debt than DCs to mitigate the costs of doing business
internationally. This finding is consistent with prior studies conducted in the developed
markets (Burgman, 1996;Chen et al.,1997;Doukas and Pantzalis, 2003;Fatemi, 1988;Lee
and Kwok, 1988;Mittoo and Zhang, 2008). This negative relation can be explained by the
market stability in the home and target markets.
Governance indicators show that Malaysia has stronger legal rights, creditor rights, legal
protection of minority shareholders and disclosure requirements than many other emerging
countries and even some of the developed countries (Claessens and Yurtoglu, 2013).
Therefore, the market is consideredrelatively stable and has lower systematic differences in
the agency costs, information asymmetry and risk compared to other emerging markets.
When Malaysian-based MNCs expand to less stable markets, they are exposed to the
adverse costs of doing business abroad. To mitigate the costs, these MNCs use less long-
term debt but more short-term debt than DCs. The findingindicates that firms do utilize debt
maturity as a disciplining tool to mitigate agency problem when they are identified by their
Second, the relation betweendebt financing and internationalization can be affected by firm
size. For large-sized MNCs, the agency costs of debt are a significant determinant of the
PAGE 30 jJOURNAL OF ASIA BUSINESS STUDIES jVOL. 13 NO. 1 2019