Who is Afraid of Political Risk? Multinational Firms and their Choice of Capital Structure

Monika Schnitzer () and Iris Kesternich

No 6468, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: This paper investigates how multinational firms choose the capital structure of their foreign affiliates in response to political risk. We focus on two choice variables, the leverage and the ownership structure of the foreign affiliate, and we distinguish different types of political risk, such as expropriation, corruption and confiscatory taxation. In our theoretical analysis we find that, as political risk increases, the ownership share always decreases, whereas leverage can both increase or decrease, depending on the type of political risk. Using the Microdatabase Direct Investment of the Deutsche Bundesbank, we find supportive evidence for these different effects.

Keywords: Capital structure; Leverage; Multinational firms; Ownership structure; Political risk (search for similar items in EconPapers)
JEL-codes: F21 F23 G32 (search for similar items in EconPapers)
Date: 2007-09
New Economics Papers: this item is included in nep-cfn and nep-pol
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (14)

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Related works:
Journal Article: Who is afraid of political risk? Multinational firms and their choice of capital structure (2010)
Working Paper: Who is afraid of political risk? Multinational firms and their choice of capital structure (2010)
Working Paper: Who is afraid of political risk? Multinational firms and their choice of capital structure (2009)
Working Paper: Who is Afraid of Political Risk? Multinational Firms and their Choice of Capital Structure (2007)
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