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

Kesternich, Iris and Schnitzer, Monika (August 2007): Who is Afraid of Political Risk? Multinational Firms and their Choice of Capital Structure. SFB/TR 15 Discussion Paper No. 213

Abstract

This paper investigates how multinational firms choose their capital structure 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, like expropriation, corruption and confiscatory taxation, and 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.

• Item Type: Paper
• Keywords: multinational Terms, political risk, capital structure, leverage, ownership structure
• Faculties: Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems; Special Research Fields > Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems > B5 - Weltwirtschaftliche Integration und die neue Firmenorganisation; Economics; Economics > Chairs > Seminar for Comparative Economics
• Subjects: 300 Social sciences > 330 Economics
• JEL Classification: F23, F21, G32
• Language: English