Partisan Conflict and Corporate Credit Spreads: The Role of Political Connection

50 Pages Posted: 27 Apr 2021 Last revised: 27 Mar 2024

See all articles by Liyao Wang

Liyao Wang

Hong Kong Baptist University

Date Written: November 1, 2023

Abstract

This paper documents a positive impact of partisan conflict on corporate credit spreads for politically connected companies and industries. The effect is both economically meaningful and statistically significant, stands under an extensive set of control variables and is stronger for speculative-grade bonds. Several approaches are adopted to resolve endogeneity issues and further establish causality. Partisan conflict affects corporate credit spreads through a discount rate channel, increases investors’ risk aversion and leads to higher borrowing costs and widening credit spreads. Affected companies respond by reducing debt issuance and postponing investments until the conflict subsides.

Keywords: Partisan conflict, Political connection, Corporate credit spreads

JEL Classification: G12, G17, P16

Suggested Citation

Wang, Liyao, Partisan Conflict and Corporate Credit Spreads: The Role of Political Connection (November 1, 2023). Journal of Corporate Finance, Vol. 84, 2024, Available at SSRN: https://ssrn.com/abstract=3834884 or http://dx.doi.org/10.2139/ssrn.3834884

Liyao Wang (Contact Author)

Hong Kong Baptist University ( email )

Hong Kong

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