Capital Structure with Risky Foreign Investment

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American multinational firms respond to politically risky environments by adjusting their capital structures abroad and at home. Foreign subsidiaries located in politically risky countries have significantly more debt than do otherforeign affiliates ofthe same parent companies. American firms further limit their equity exposures in politically risky countries by sharing ownership with local partners and by serving foreign markets with exports rather than local production. The residual political risk borne by parent companies leads them to use less domestic leverage, resulting in lower firm-wide leverage. Multinational firms with above-average exposures to politically risky countries have 8.4 percent less domestic leverage than do other firms. These findings illustrate the impact of risk exposures on capital structure.


©2006 by Mihir A. Desai, C. Fritz Foley and James R. Hines Jr. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source.

The publisher's final version may be found as Hines, James R., Jr., co-author. "Capital Structure with Risky Foreign Investment." M. A. Desai and C. F. Foley, co-authors. J. Fin. Econ. 88, no. 3 (2008): 534-53.