Does Political Uncertainty Increase External Financing Costs? Measuring the Electoral Premium in Syndicated Lending

Journal of Financial and Quantitative Analysis

55 Pages Posted: 4 Dec 2013 Last revised: 2 Jun 2019

See all articles by Olivia Kim

Olivia Kim

MIT Sloan School of Management

Date Written: February 1, 2018

Abstract

This paper examines a contractual lending channel through which political uncertainty matters in a large sample of syndicated loans involving 63 borrower and 35 lender countries between 1990 and 2008. To address the endogenous nature of political uncertainty and simultaneity of credit demand and supply, I use a within-firm estimation approach that exploits differences in lenders’ exposure to national elections around the world as a source of plausibly exogenous time-series variation in political uncertainty. I document that firms pay on average 7 basis points more on loans originated when their lenders are undergoing a national election relative to when their lenders are not undergoing a national election. Consistent with electoral uncertainty driving this premium, the most contested elections have the largest impact (17 bps). Lenders from less financially developed countries are more likely to pass-through political uncertainty costs to borrowers, especially to those from weak creditor rights countries. Overall, political uncertainty leads to a tangible increase in firms’ financing costs.

Suggested Citation

Kim, Olivia, Does Political Uncertainty Increase External Financing Costs? Measuring the Electoral Premium in Syndicated Lending (February 1, 2018). Journal of Financial and Quantitative Analysis. Available at SSRN: https://ssrn.com/abstract=2362071 or http://dx.doi.org/10.2139/ssrn.2362071

Olivia Kim (Contact Author)

MIT Sloan School of Management ( email )

100 Main Street
Cambridge, MA 02142
United States

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