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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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Paper provided by University of Munich, Department of Economics in its series Munich Reprints in Economics with number 19473.

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Date of creation: 2010
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Publication status: Published in Journal of International Economics 2 82(2010): pp. 208-218
Handle: RePEc:lmu:muenar:19473
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