Cost of capital in an international context: Institutional distance, quality, and dynamics

Lindner, Thomas and Müllner, Jakob and Puck, Jonas (2016) Cost of capital in an international context: Institutional distance, quality, and dynamics. Journal of International Management, 22 (3). pp. 234-248. ISSN 1075-4253

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Abstract

Cost of debt is a key cognitive anchor for managerial decisions and an important determinant of firm profitability. We extend international management research by analyzing the effects of institutional distance, institutional quality, and their dynamics on the cost of debt in the context of foreign direct investments (FDI). We test our conceptual model on a sample of companies making 3,764 greenfield foreign direct investments from developed into less developed markets. Using hierarchical linear modelling, we show that the financial consequences of internationalizing into countries with weak institutions depend on both the institutional distance between countries, as well as their institutional quality. Furthermore, we find that recent changes in institutional quality form expectations about future development and ultimately influence post investment financing costs.

Item Type: Article
Keywords: cost of debt / trade-off theory / institutional perspective / foreign direct investments / developing countries
Divisions: Departments > Welthandel
Departments > Welthandel > BWL des Außenhandels > Nf. Moser
Departments > Welthandel > International Business
Departments > Welthandel > International Business > Puck
Kompetenzzentren > Emerging Markets and CEE
Version of the Document: Accepted for Publication
Variance from Published Version: Typographical
Depositing User: Elena Simukovic
Date Deposited: 09 May 2017 11:22
Last Modified: 26 Nov 2018 12:47
Related URLs:
FIDES Link: https://bach.wu.ac.at/d/research/results/74599/
URI: https://epub.wu.ac.at/id/eprint/5544

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