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

43 Pages Posted: 21 Nov 2010 Last revised: 5 Dec 2010

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)

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Date Written: November 20, 2010

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, 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.

Keywords: Multinational Firms, Political Risk, Capital Structure, Leverage, Ownership Structure, Foreign Affiliates

JEL Classification: F23, F21, G32

Suggested Citation

Kesternich, Iris and Schnitzer, Monika, Who is Afraid of Political Risk? Multinational Firms and Their Choice of Capital Structure (November 20, 2010). Journal of International Economics, Vol. 82, No. 2, 2010. Available at SSRN: https://ssrn.com/abstract=1712384

Iris Kesternich (Contact Author)

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

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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