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Investment, leverage and political risk: Evidence from project-level FDI

King, Timothy, Loncan, Tiago, Khan, Zaheer (2021) Investment, leverage and political risk: Evidence from project-level FDI. Journal of Corporate Finance, 67 . Article Number 101873. ISSN 0929-1199. (doi:10.1016/j.jcorpfin.2020.101873) (Access to this publication is currently restricted. You may be able to access a copy if URLs are provided) (KAR id:85375)

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https://doi.org/10.1016/j.jcorpfin.2020.101873

Abstract

Does capital structure influence firms' FDI capital expenditure decisions into countries with varying degrees of political risk? We explore this question using a novel dataset that matches 10,000 unique outward foreign direct investment (OFDI) projects with 1135 distinct U.S. firms over the period 2003–2014. We find that capital expenditures allocated to FDI projects are significantly lower for highly leveraged firms, in particular for firms with low growth opportunities. Firms also commit lower capital amounts to investments located in countries characterized by higher political risk. Furthermore, leverage and political risk interact with one another in determining the financial commitment of the FDI, with leverage exerting a significantly stronger negative effect on capital expenditures in countries where political risk is elevated. Our findings are consistent with the monitoring role of debt in curbing exposure to political risk in multinational firms' foreign operations, and corroborate the disciplinary role of leverage on firms' investment decisions.

Item Type: Article
DOI/Identification number: 10.1016/j.jcorpfin.2020.101873
Uncontrolled keywords: FDI, Capital Structure; Political Risk; Leverage; Corporate Investment
Subjects: H Social Sciences
Divisions: Divisions > Kent Business School - Division > Department of Accounting and Finance
Depositing User: Timothy King
Date Deposited: 08 Jan 2021 11:09 UTC
Last Modified: 07 Oct 2021 08:46 UTC
Resource URI: https://kar.kent.ac.uk/id/eprint/85375 (The current URI for this page, for reference purposes)
King, Timothy: https://orcid.org/0000-0002-7326-2162
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