Multinational firms' internal borrowing impacts domestic bank loans and stability

Multinational enterprises (MNEs) can propagate productivity and credit supply shocks across borders through their internal capital markets.

This paper extends the costly-state-verification model to an MNE framework, analyzing external and internal financing decisions of parents and affiliates.

The theoretical predictions suggest that more productive foreign affiliates rely more on external borrowing from local banks and less on internal funding from their parent.

Conversely, parent firms adjust their own financing structure, reducing external liabilities with domestic banks relative to the affiliate's total assets.

These dynamics mean that financial conditions can transmit across borders, even between countries with similar monetary and regulatory environments.

The study empirically validates these predictions using comprehensive mandatory-reporting data on all Austrian MNEs and their German affiliates for the period 2007–2022, combining balance sheet and loan-level information from the Austrian credit register.

The empirical analysis, based on a unique dataset from the Oesterreichische Nationalbank, strongly supports the theoretical predictions.

German affiliates with higher returns on capital borrow a significantly smaller share of their assets internally from Austrian parents, while increasing their external leverage.

Correspondingly, Austrian parent firms reduce their internal lending to more productive German affiliates and decrease their external borrowing from Austrian banks, relative to the affiliate's total assets.

These findings are robust even when comparing affiliates of the same parent in the same year, highlighting the direct link between firm productivity and group financing decisions.

The study underscores the critical role of internal capital markets in transmitting financial conditions and economic shocks across borders, linking domestic bank lending with foreign investment.