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

45 Pages Posted: 30 May 2008

See all articles by Iris Kesternich

Iris Kesternich

KU Leuven - Department of Economics; Ludwig Maximilian University of Munich (LMU) - Faculty of Economics

Monika Schnitzer

University of Munich - Department of Economics; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 3 versions of this paper

Date Written: September 2007

Abstract

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, corruption and confiscatory taxation. 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.

Keywords: capital structure, leverage, Multinational firms, ownership structure, political risk

JEL Classification: F21, F23, G32

Suggested Citation

Kesternich, Iris and Schnitzer, Monika, Who is Afraid of Political Risk? Multinational Firms and Their Choice of Capital Structure (September 2007). CEPR Discussion Paper No. DP6468. Available at SSRN: https://ssrn.com/abstract=1138581

Iris Kesternich

KU Leuven - Department of Economics ( email )

Leuven, B-3000
Belgium

Ludwig Maximilian University of Munich (LMU) - Faculty of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany

Monika Schnitzer (Contact Author)

University of Munich - Department of Economics ( email )

Ludwigstrasse 28
Munich, D-80539
Germany
+49 89 2180 2217 (Phone)
+49 89 2180 2767 (Fax)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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