CROSS-BORDER LIABILITY OF MULTINATIONAL-ENTERPRISES, BORDER TAXES, AND CAPITAL STRUCTURE

Under incomplete contracting, limited liability creates differential valuations of investments from private and government perspectives. Managers in the private sector tend to overinvest in risky technologies, compared to levels of investment that are optimal from the standpoint of the society as a whole. This problem is exacerbated from the point of view of the host government when a multinational enterprise (MNE) engages in cross-border investments but faces incomplete cross-border liability, since there is the likelihood of localization of costs and globalization of benefits. This paper explores financial management implications of policies for the MNE and derives some empirically testable predictions.