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

Abstract

This paper investigates how multinational firms choose their capital structure 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, like expropriation, corruption and confiscatory taxation, and 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.

State-owned MNCs and host country expropriation risk: The role of home state soft power and economic gunboat diplomacy

“…Expropriation occurs when a host government interferes with a foreign investor's fundamental ownership rights. This can take the form of a direct seizure of assets or it can be through a series of discriminatory actions, often called "creeping expropriation" (Kesternich & Schnitzer, 2010).…”

Primary Sources of Corporate Investment in Hungary

“…5). As was detailed in the literature summary, in countries with high (political and economic) risk, foreign companies have a greater preference for local sources than international sources of financing (Hooper, 2004;Kesternich and Schnitzer, 2010). We can explain this risk in Hungary as the general consequence of the financial crisis but it was also due to the above mentioned special taxes which Hungarian government levied which affected foreign-owned companies the most.…”

“…Beyond this fact, the relating literature supplies other possible explanations of the insignificance of owners' loans after 2008. A foreign investor will reduce the proportion of its own contribution (equity or parents' loan) to capital structure and with finance the firm's investments using local bank loans if the economic/political risk of the (host) country is increasing for them (Kesternich and Schnitzer, 2010) or if they meet repayment and/or effort problems (Marin and Schnitzer, 2011). This way they can maximize their financial leverage and minimize the owners' risk.…”

“…Kesternich and Schnitzer (2010) explore theoretically and empirically how multinational firms choose the capital structure of their foreign affiliates in response to different forms of political risk.…”

Relationship between Economic Security and Country Risk Indicators in EU Baltic Sea Region Countries

“…After analysing of different scientific articles and different opinions of researchers (Kesternich & Schnitzer, 2010;Bordo, Meissner, & Weidenmier, 2009;Busse & Hefeker, 2006;Finnerty, 2001), it is clear that the concept of economic security is complex and dynamic. Its complexity stems from the multitude of economic, social, financial processes, as well as, from the phenomena of globalisation Scheve, Kenneth, & Slaughter, 2002), seen both as a process and as a phenomenon acting systematically and permanently upon national economies.…”