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
Date Written: November 20, 2010
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: Suggested Citation