Capital Structure with Risky Foreign Investment

33 Pages Posted: 17 May 2006  

Mihir A. Desai

Harvard Business School - Finance Unit; National Bureau of Economic Research (NBER)

C. Fritz Foley

Harvard Business School; National Bureau of Economic Research (NBER)

James R. Hines Jr.

University of Michigan; NBER

Multiple version iconThere are 2 versions of this paper

Date Written: September 2006

Abstract

Political risks increase the volatility of multinational firm operating returns, prompting firms to adjust their capital structures. Politically risky countries feature more volatile returns, and the volatility of a parent company's aggregate foreign returns also increases with the extent of the firm's political risk exposure. Parent companies mitigate the cost of return volatility by adjusting their capital structures: a one standard deviation increase in exposure to political risks reduces domestic leverage by 4.4% of its mean level. Foreign political risks most strongly influence the capital structures of firms in industries that are particularly susceptible to political risks. These results suggest that other business risks may similarly affect capital structures.

Keywords: Capital Structure, Political Risk, Leverage, Expropriation

JEL Classification: G15, G32, F30

Suggested Citation

Desai, Mihir A. and Foley, C. Fritz and Hines Jr., James R., Capital Structure with Risky Foreign Investment (September 2006). Available at SSRN: https://ssrn.com/abstract=902489 or http://dx.doi.org/10.2139/ssrn.902489

Mihir A. Desai (Contact Author)

National Bureau of Economic Research (NBER)

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Harvard Business School - Finance Unit ( email )

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C. Fritz Foley

Harvard Business School ( email )

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National Bureau of Economic Research (NBER)

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James Rodger Hines

University of Michigan ( email )

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NBER

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United States

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