Slow to Adjust: International Diversification and the Speed of Adjustment to Cash and Leverage Targets

Abstract

Using 53,121 U.S. firm-year observations from 1989 through 2024, I estimate target cash holdings and leverage ratios and measure deviations from these targets as excess cash and excess debt capacity, respectively, for internationally diversified firms. I find that internationally diversified firms hold significantly higher excess cash and excess debt capacity than domestic firms, consistent with greater information asymmetry and weaker external monitoring. More importantly, internationally diversified firms adjust more slowly toward their target cash and leverage levels. This effect is mitigated by product market competition, and the results are robust to an instrumental-variable approach addressing the endogeneity of diversification. Overall, my findings suggest that international diversification impedes firms' ability to adjust toward optimal financial policies, with implications for capital structure and liquidity management in multinational firms.