DP6468 Who is Afraid of Political Risk? Multinational Firms and their Choice of Capital Structure

Author(s): Iris Kesternich, Monika Schnitzer
Publication Date: September 2007
Keyword(s): capital structure, leverage, Multinational firms, ownership structure, political risk
JEL(s): F21, F23, G32
Programme Areas: International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=6468

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, corruption and confiscatory taxation. 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.