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

Iris Kesternich and Monika Schnitzer ()

Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems from Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich

Abstract: This paper investigates how multinational firms choose their capital structure 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, like expropriation, corruption and confiscatory taxation, and 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: multinational Terms; political risk; capital structure; leverage; ownership structure (search for similar items in EconPapers)
JEL-codes: F21 F23 G32 (search for similar items in EconPapers)
Date: 2007-08
New Economics Papers: this item is included in nep-pol
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Citations: View citations in EconPapers (3)

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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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