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Capital Structure with Risky Foreign Investment

  • Mihir A. Desai
  • C. Fritz Foley
  • James R. Hines Jr.

American multinational firms respond to politically risky environments by adjusting their capital structures abroad and at home. Foreign subsidiaries located in politically risky countries have significantly more debt than do other foreign affiliates of the same parent companies. American firms further limit their equity exposures in politically risky countries by sharing ownership with local partners and by serving foreign markets with exports rather than local production. The residual political risk borne by parent companies leads them to use less domestic leverage, resulting in lower firm-wide leverage. Multinational firms with above-average exposures to politically risky countries have 8.4 percent less domestic leverage than do other firms. These findings illustrate the impact of risk exposures on capital structure.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12276.

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Date of creation: Jun 2006
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Publication status: published as Desai, Mihir A. & Fritz Foley, C. & Hines Jr., James R., 2008. "Capital structure with risky foreign investment," Journal of Financial Economics, Elsevier, vol. 88(3), pages 534-553, June.
Handle: RePEc:nbr:nberwo:12276
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