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

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Author Info
Iris Kesternich (University of Munich, Department of Economics, Ludwigstr. 28 Rg, D-80539 Munich, Germany. Phone: +49 89 2180 3955, Fax: +49 89 2180 3954, Iris.Kesternich@lrz.uni-muenchen.de)
Monika Schnitzer (University of Munich, Department of Economics and Centre for Economic Policy Research, Akademiestr. 1/III, D-80799 Munich, Germany. Phone: +49 89 2180 2217, Fax: +49 89 2180 2767, schnitzer@lrz.uni-muenchen.de)

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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.

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Publisher Info
Paper provided by SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich in its series Discussion Papers with number 213.

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Date of creation: Aug 2007
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Handle: RePEc:trf:wpaper:213

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Related research
Keywords: multinational Terms; political risk; capital structure; leverage; ownership structure;

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

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  1. Schnitzer, Monika, 1999. "Expropriation and control rights: A dynamic model of foreign direct investment," International Journal of Industrial Organization, Elsevier, vol. 17(8), pages 1113-1137, November. [Downloadable!] (restricted)
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  2. Eaton, Jonathan & Fernandez, Raquel, 1995. "Sovereign debt," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 3, pages 2031-2077 Elsevier. [Downloadable!] (restricted)
    Other versions:
  3. Monika Schnitzer, 1996. "Expropriation and Control Rights: A Dynamic Model of," Discussion Paper Serie A 515, University of Bonn, Germany. [Downloadable!]
  4. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law & Economics, University of Chicago Press, vol. 26(2), pages 301-25, June.
  5. 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)
  6. Morck, Randall & Shleifer, Andrei & Vishny, Robert W., 1988. "Management ownership and market valuation : An empirical analysis," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 293-315, January. [Downloadable!] (restricted)
  7. Muller, Thomas & Schnitzer, Monika, 2006. "Technology transfer and spillovers in international joint ventures," Journal of International Economics, Elsevier, vol. 68(2), pages 456-468, March. [Downloadable!] (restricted)
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  8. Thomas, Jonathan & Worrall, Tim, 1994. "Foreign Direct Investment and the Risk of Expropriation," Review of Economic Studies, Blackwell Publishing, vol. 61(1), pages 81-108, January. [Downloadable!] (restricted)
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  9. Demsetz, Harold, 1983. "The Structure of Ownership and the Theory of the Firm," Journal of Law & Economics, University of Chicago Press, vol. 26(2), pages 375-90, June.
  10. Jack Mintz & Alfons Weichenrieder, 2005. "Taxation and the Financial Structure of German Outbound FDI," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  11. Konrad, Kai A. & Erik Lommerud, Kjell, 2001. "Foreign direct investment, intra-firm trade and ownership structure," European Economic Review, Elsevier, vol. 45(3), pages 475-494, March. [Downloadable!] (restricted)
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  12. McConnell, John J. & Servaes, Henri, 1990. "Additional evidence on equity ownership and corporate value," Journal of Financial Economics, Elsevier, vol. 27(2), pages 595-612, October. [Downloadable!] (restricted)
  13. James H. Scott Jr., 1976. "A Theory of Optimal Capital Structure," Bell Journal of Economics, The RAND Corporation, vol. 7(1), pages 33-54, Spring. [Downloadable!] (restricted)
  14. 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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