The process of internationalization enables multinational corporations (MNCs) to diversify their sources and types of debt, as well as earnings. The problem, however, is that this process can also negatively impact firm risk due to the agency costs of debt. In this paper we extend existing work that shows how multinational firms may use the different financial risks associated with different types of debt to mitigate agency risks. A key novelty is that we consider debt with and without convertible options and focus on agency issues associated with convertibility. The results confirm that both domestic and multinational firms use long term debt to match the growth opportunities of the firm measured by the Market to Book Ratio to reduce liquidity risks and default probabilities. Institutional investors utilize convertible debt as a way of controlling agency costs by imposing restrictions on the absolute level of debt. This is consistent with institutional investors proactively managing the potential benefits from convertible debt holdings that arise from the long-term growth options associated with international expansion.

Jonathan A. Batten holds the CIMB-UUM Chair in Banking and Finance at University Utara Malaysia, is an Honorary Professor in the Discipline of Finance at the University of Sydney Business School, Australia and a Chair Professor at the East China University of Science & Technology, Shanghai, China. His current research is based on assessing the impact on banking and financial markets of the expected worldwide shift to renewable energy and adjusting to the effects of climate change. He is the managing editor of Elsevier’s highly ranked Emerging Markets Review and Journal of International Financial Markets Institutions and Money, and co-editor of Finance Research Letters. Prior to working in academia, he held senior treasury and risk management consulting positions with several institutions including Bank of Tokyo, Credit Lyonnais, IBM Consulting and Reuters Ltd. He has received several external research grants from the Asian Development Bank and the World Bank on the development of fixed income markets in the Asia-Pacific region, the international payments organization SWIFT on the internationalization of the RMB, and the international regulator, the Bank for International Settlements.