Empirical studies indicate that MNEs have higher costs of capital than purely domestic firms. This could be due to higher levels of:
A) political risk.
B) exchange rate risk.
C) agency costs.
D) all of the above

Question

Quizplus · Accepted Answer

Empirical studies suggest that MNEs have higher costs of capital due to a combination of factors such as political risk, exchange rate risk, and agency costs. Political risk refers to the uncertainty surrounding the outcome of political decisions or events in a foreign country. Exchange rate risk refers to the volatility in exchange rates that can affect the profitability and cash flows of MNEs. Agency costs arise due to the separation of ownership and control in MNEs, leading to conflicts of interest between managers and shareholders, which can increase the cost of capital. Therefore, all of the above factors contribute to the higher costs of capital for MNEs compared to purely domestic firms.

Empirical Studies Indicate That MNEs Have Higher Costs of Capital