Policy Risk, Corporate Political Strategies, and the Cost of Debt

52 Pages Posted: 17 Mar 2012 Last revised: 3 Mar 2017

See all articles by Daniel Bradley

Daniel Bradley

University of South Florida

Christos Pantzalis

University of South Florida

Xiaojing Yuan

University of Massachusetts Lowell - Department of Finance

Date Written: June 8, 2016

Abstract

We examine how political geography affects firms’ cost of debt. Local policy risk, measured by proximity to political power reflected in firms’ position in the country’s political map, is positively related to firms’ cost of debt. Employing a difference-in-difference-in-differences (DDD) estimation around presidential elections, we find that firms headquartered in states that become more aligned with the president after elections are exposed to more policy risk and thus incur higher yield spreads. Firms can manage policy risk by engaging in corporate political strategies. Consistent with the view that such political strategies protect firms against uncertainty about future policies, we find policy risk has less of an impact on a firm’s cost of debt when the firm makes more PAC contributions or spends more money on lobbying..

Keywords: Policy Risk, Corporate Political Strategies, Political Connections, Corporate Bond Ratings, Yield Spread

JEL Classification: G10, G12, G32

Suggested Citation

Bradley, Daniel and Pantzalis, Christos and Yuan, Xiaojing, Policy Risk, Corporate Political Strategies, and the Cost of Debt (June 8, 2016). Journal of Corporate Finance, Volume 40, Pages 254–275. Available at SSRN: https://ssrn.com/abstract=2023894 or http://dx.doi.org/10.2139/ssrn.2023894

Daniel Bradley

University of South Florida ( email )

Tampa, FL 33620
United States

Christos Pantzalis (Contact Author)

University of South Florida ( email )

Tampa, FL 33620-5500
United States
(813) 974-3262 (Phone)

Xiaojing Yuan

University of Massachusetts Lowell - Department of Finance ( email )

Lowell, MA 01854
United States

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