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

This paper investigates how multinational firms choose the capital structure of theirforeign affiliates in response to political risk. We focus on two choice variables, theleverage and the ownership structure of the foreign affiliate, and we distinguish differenttypes of political risk, such as expropriation, unreliable intellectual propertyrights and confiscatory taxation. In our theoretical analysis we find that, as politicalrisk increases, the ownership share tends to decrease, whereas leverage can both increaseor decrease, depending on the type of political risk. Using the MicrodatabaseDirect Investment of the Deutsche Bundesbank, we find supportive evidence for thesedifferent effects.[...] Iris Kesternich, Monika Schnitzer