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Who is afraid of political risk? Multinational firms and their choice of capital structure

  • Kesternich, Iris
  • Schnitzer, Monika

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, unreliable intellectual property rights and confiscatory taxation. In our theoretical analysis we find that, as political risk increases, the ownership share tends to decrease, 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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Article provided by Elsevier in its journal Journal of International Economics.

Volume (Year): 82 (2010)
Issue (Month): 2 (November)
Pages: 208-218

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Handle: RePEc:eee:inecon:v:82:y:2010:i:2:p:208-218
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505552

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  17. Jonathan Eaton & Mark Gersovitz, 1982. "A Theory of Expropriation and Deviations From Perfect Capital Mobility," NBER Working Papers 0972, National Bureau of Economic Research, Inc.
  18. Beata S. Javorcik & Shang-Jin Wei, 2009. "Corruption and Cross-Border Investment in Emerging Markets: Firm-Level Evidence," Working Papers 062009, Hong Kong Institute for Monetary Research.
  19. 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.
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