Political Rights and the Cost of Debt

60 Pages Posted: 17 Mar 2008 Last revised: 27 Jan 2013

See all articles by Yaxuan Qi

Yaxuan Qi

City University of Hong Kong (CityUHK) - Department of Economics & Finance

John K. Wald

University of Texas at San Antonio

Lukas Roth

University of Alberta - Department of Finance and Statistical Analysis

Date Written: April 23, 2009

Abstract

We examine the impact of country-level political rights on the cost of debt for corporate bonds issued by firms incorporated in 39 countries. Similar to, but separate from, the relation for creditor rights, greater political rights are associated with lower yield spreads. A one standard deviation increase in political rights is associated with an 18.6% decline in bond spreads. We find evidence that political and legal institutions are substitutes; marginal improvements in political rights produce greater reductions in the cost of debt for firms from countries with weaker creditor rights. We examine potential factors through which political rights may affect the cost of debt and find that greater freedom of the press provides an important channel for reducing bond risks. Moreover, debt of firms with cross-listed equity trades at a premium in U.S. markets, but this relation appears to be more consistent with improved visibility than with bonding effects.

Keywords: Political institutions, creditor rights, cost of debt, bond yield spreads, freedom of the press, cross-listing

JEL Classification: G12, G18, K22, P16

Suggested Citation

Qi, Yaxuan and Wald, John K. and Roth, Lukas, Political Rights and the Cost of Debt (April 23, 2009). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1091008

Yaxuan Qi

City University of Hong Kong (CityUHK) - Department of Economics & Finance ( email )

83 Tat Chee Avenue
Kowloon
Hong Kong

John K. Wald

University of Texas at San Antonio ( email )

1 UTSA Circle
San Antonio, TX 78249
United States
210-458-6324 (Phone)

Lukas Roth (Contact Author)

University of Alberta - Department of Finance and Statistical Analysis ( email )

2-32E Business Building
Edmonton, Alberta T6G 2R6
Canada
780-492-4431 (Phone)
780-492-3325 (Fax)

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