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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 Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2009,02.

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Date of creation: 2009
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Handle: RePEc:zbw:bubdp1:7571
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  8. Eaton, J. & Fernandez, R., 1995. "Sovereign Debt," Papers 37, Boston University - Department of Economics.
  9. Schnitzer, Monika, 2002. "Debt v. foreign direct investment: The impact of sovereign risk on the structure of international capital flows," Munich Reprints in Economics 19886, University of Munich, Department of Economics.
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  11. Buettner, Thiess & Overesch, Michael & Schreiber, Ulrich & Wamser, Georg, 2009. "Taxation and capital structure choice--Evidence from a panel of German multinationals," Economics Letters, Elsevier, vol. 105(3), pages 309-311, December.
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  17. Huizinga, Harry & Laeven, Luc & Nicodeme, Gaetan, 2008. "Capital structure and international debt shifting," Journal of Financial Economics, Elsevier, vol. 88(1), pages 80-118, April.
  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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  25. 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.
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