Capital structure with risky foreign investment

Firms facing significant business risks have incentives to mitigate the costs of these risks by adjusting their capital structures. This paper investigates this link by analyzing the exposures of multinational firms to political risk. The evidence indicates that returns on investment in politically...

Full description

Saved in:
Bibliographic Details
Published inJournal of financial economics Vol. 88; no. 3; pp. 534 - 553
Main Authors Desai, Mihir A., Fritz Foley, C., Hines, James R.
Format Journal Article
LanguageEnglish
Published Elsevier B.V 01.06.2008
Elsevier
SeriesJournal of Financial Economics
Subjects
Capital structure
Financial management
International investment
Multinational enterprises
Multinational firms
Political conditions
Political risk
Risk
Volatility
H11
Political risk
F23
Capital structure
G32
Multinational firms
Online AccessGet full text

Cover

More Information
Summary:Firms facing significant business risks have incentives to mitigate the costs of these risks by adjusting their capital structures. This paper investigates this link by analyzing the exposures of multinational firms to political risk. The evidence indicates that returns on investment in politically risky countries are more volatile than returns elsewhere. Multinational firms reduce their leverage in response to these political risks: a one standard deviation increase in foreign political risk is associated with 3.5% reduced leverage. The effect of foreign political risks on leverage is most pronounced for firms in industries whose returns are most susceptible to political influence.
Bibliography:ObjectType-Article-2
SourceType-Scholarly Journals-1
ObjectType-Feature-1
content type line 23
ISSN:0304-405X
1879-2774
DOI:10.1016/j.jfineco.2007.05.002