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Who is afraid of political risk? Multinational firms and their choice of capital structure
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Who is afraid of political risk? Multinational firms and their choice of capital structure

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  • Kesternich, Iris
  • Schnitzer, Monika

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.

Suggested Citation

  • Kesternich, Iris & Schnitzer, Monika, 2009. "Who is afraid of political risk? Multinational firms and their choice of capital structure," Discussion Paper Series 1: Economic Studies 2009,02, Deutsche Bundesbank.
    • Handle: RePEc:zbw:bubdp1:7571
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    More about this item

    Keywords

    Multinational firms; political risk; capital structure; leverage; ownership structure; foreign affiliates;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business

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