Who Is Afraid Of Political Risk? Multinational Firms And Their Choice Of Capital Structure

This paper investigates how multinational firms choose their capital structure in response to political risk. The authors focus on two choice variables, the leverage and the ownership structure of the foreign affiliate, and they distinguish different types of political risk, like expropriation, corruption and consecratory taxation, and In the theoretical analysis they 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 Micro database Direct Investment of the Deutsche Bundesbank, they find supportive evidence for these different effects.