Capital Structure with Risky Foreign Investment

33 Pages Posted: 8 Jun 2006 Last revised: 19 Jul 2010

See all articles by Mihir A. Desai

Mihir A. Desai

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

C. Fritz Foley

Harvard University - Business School (HBS); 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: June 2006

Abstract

American multinational firms respond to politically risky environments by adjusting their capital structures abroad and at home. Foreign subsidiaries located in politically risky countries have significantly more debt than do other foreign affiliates of the same parent companies. American firms further limit their equity exposures in politically risky countries by sharing ownership with local partners and by serving foreign markets with exports rather than local production. The residual political risk borne by parent companies leads them to use less domestic leverage, resulting in lower firm-wide leverage. Multinational firms with above-average exposures to politically risky countries have 8.4 percent less domestic leverage than do other firms. These findings illustrate the impact of risk exposures on capital structure.

Suggested Citation

Desai, Mihir A. and Foley, C. Fritz and Hines, James Rodger, Capital Structure with Risky Foreign Investment (June 2006). NBER Working Paper No. w12276. Available at SSRN: https://ssrn.com/abstract=906754

Mihir A. Desai (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
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617-495-6693 (Phone)
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National Bureau of Economic Research (NBER)

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C. Fritz Foley

Harvard University - Business School (HBS) ( 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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Ann Arbor, MI 48109-1215
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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