Capital structure effects of international expansion

•We examine the implications of new international expansion on firms’ capital structure.•When the target foreign market is developed, the new market entry leads to no significant change in capital structure, whatever the past experience of the firm.•The capital structure of well-diversified firms is not significantly modified following a new foreign entry.•A changing capital structure due to foreign entry depends first of all on the initial level of corporate international diversification.•Both domestic firms and firms that are initially only active in developed markets increase their debt proportion after a new foreign entry, especially if this is a pure inexperienced foreign destination.

This study investigates and qualifies the impact of internationalization on the capital structure of a firm. Previous studies have associated firm internationalization with foreign sales or foreign assets. However, an increase in sales volume generated abroad does not necessarily mean that a firm has actually invested in a new foreign country. This study examines non-financial firms included in the main developed stock indexes that report a new geographical area of operation. It reveals that, at less advanced levels of internationalization, growth in foreign volumes and new geographic expansion lead to differential decision-making in capital structure choices.This study concludes that (1) when the target foreign market is developed, the new market entry does not lead to significant changes in capital structure, whatever the past experience of the firm. (2) The capital structure of well-diversified firms is not significantly modified following a new foreign entry. (3) Both domestic firms and firms only active in developed markets significantly increase their debt to equity ratio when expanding into a region or country where they had no operation before. Well-diversified firms clearly exhibit a different behavior compared to firms in less advanced levels of internationalization.