Working Paper: CEPR ID: DP6468
Authors: Iris Kesternich; Monika Schnitzer
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, 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.
Keywords: capital structure; leverage; multinational firms; ownership structure; political risk
JEL Codes: F21; F23; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Political Risk (P26) | Ownership Share (G32) |
| Political Risk (Expropriation) (H13) | Leverage (G32) |
| Political Risk (Creeping Expropriation) (H13) | Leverage (G32) |
| Political Risk (Confiscatory Taxation) (H13) | Leverage (G32) |
| Ownership Share (G32) | Leverage (G32) |