Political Hazards, Corporate Financing, and International Investment Decisions - Empirical Evidence for German Firms

Abstract

This paper discusses the two-sided relationship between political risks of international activities and a company's financial structure. In addition to earlier studies, looking at political risk exposures as predictors of financial structure only, the analyses explicitly take into consideration the reciprocal relationship. Results indicate that companies respond to increased political risks with a reduction in total leverage. The effect is almost completely offset if companies use foreign capital markets to naturally hedge their risk exposures. Although the probability of international market entries is positively related to their ability to generate discretionary funds, and thus negatively to firms' leverage, no cross-relationship between political risks and financial structure could be detected for international market entries.