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

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Author Info
Kesternich, Iris
Schnitzer, Monika

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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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6468.

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Date of creation: Sep 2007
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Handle: RePEc:cpr:ceprdp:6468

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Related research
Keywords: capital structure leverage Multinational firms ownership structure political risk

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Find related papers by JEL classification:
F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure

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Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Monika Schnitzer, 1996. "Expropriation and Control Rights: A Dynamic Model of," Discussion Paper Serie A 515, University of Bonn, Germany. [Downloadable!]
  2. Eckhard Janeba, 2000. "Tax Competition When Governments Lack Commitment: Excess Capacity as a Countervailing Threat," American Economic Review, American Economic Association, vol. 90(5), pages 1508-1519, December. [Downloadable!] (restricted)
  3. Müller, Thomas & Schnitzer, Monika, 2003. "Technology Transfer and Spillovers in International Joint Ventures," CEPR Discussion Papers 4099, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  4. Mihir A. Desai & C. Fritz Foley & James R. Hines, 2004. "A Multinational Perspective on Capital Structure Choice and Internal Capital Markets," Journal of Finance, American Finance Association, vol. 59(6), pages 2451-2487, December. [Downloadable!] (restricted)
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