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

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 (C) 2010 Elsevier B V All lights reserved