Chapter 17 Multinational Financial Management 559pension assets. Therefore, net pension liabilities are zero. If this! rm was in the
United States, it would report a ratio of total liabilities to total assets equal to 50%
($10 million/$20 million). By contrast, if this! rm operated in Germany, both its
pension assets and liabilities would be reported on the balance sheet. The! rm
would have $20 million in liabilities and $30 million in assets—or a 67% ($20 mil-
lion/$30 million) ratio of total liabilities to total assets. Total debt is the sum of
short-term debt and long-term debt and excludes other liabilities including pen-
sion liabilities. Therefore, the measure of total debt to total assets provides a more
comparable measure of leverage across different countries.
Rajan and Zingales also make a variety of adjustments that attempt to control
for other differences in accounting practices. The effects of these adjustments are
reported in Columns 3 and 4. Overall, the evidence suggests that companies in
Germany and the United Kingdom tend to have less leverage, whereas! rms in
Canada appear to have more leverage relative to! rms in the United States, France,
Italy, and Japan. This conclusion is supported by data in the! nal column, which
shows the average times-interest-earned ratio for! rms in a number of different
countries. Recall from Chapter 4 that the TIE ratio is the ratio of operating income
(EBIT) to interest expense. This measure indicates how much cash the! rm has
available to service its interest expense. In general,! rms with more leverage have
a lower times-interest-earned ratio. The data indicate that this ratio is highest in
the United Kingdom and Germany and lowest in Canada.
Median Capital Structures among Large Industrialized Countries
(Measured In Terms of Book Value)Tabl e 17 - 5Country
Total
Liabilities to
Total Assets
(Unadjusted
for
Accounting
Differences)
(1)Debt to
Total Assets
(Unadjusted
for
Accounting
Differences)
(2)Total
Liabilities to
Total Assets
(Adjusted
for
Accounting
Differences)
(3)Debt to
Total Assets
(Adjusted
for
Accounting
Differences)
(4)Times
Interest
Earned (TIE)
Ratio
(5)
Canada 56% 32% 48% 32% 1.55%
France 71 25 69 18 2.64
Germany 73 16 50 11 3.20
Italy 70 27 68 21 1.81
Japan 69 35 62 21 2.46
United Kingdom 54 18 47 10 4.79
United States 58 27 52 25 2.41
Mean 64% 26% 57% 20% 2.69%
Standard deviation 8% 7% 10% 8% 1.07%
Source: Raghuram Rajan and Luigi Zingales, “What Do We Know about Capital Structure? Some Evidence from International Data,” Journal of
Finance, Vol. 50, no. 5 (December 1995), pp. 1421–1460. Used with permission.
SELF^ TEST Do international di# erences in " nancial leverage exist? Explain.