Political Uncertainty and a Firm’s Credit Risk: Evidence from the International CDS Market
43 Pages Posted: 24 Aug 2014 Last revised: 4 May 2017
Date Written: February 18, 2017
Using a large sample of firms with single-name credit default swap (CDS) contracts in 30 countries, we document the evidence that political uncertainty, proxied by national election dummy, is positively related to firm-level credit risk. Specifically, this positive relation is more pronounced for the firms that have no political connection or poor international diversification, and in the countries with higher political uncertainty and lower investor protections. Further, by using a difference-in-differences approach, we find evidence to support idiosyncratic volatility and debt rollover channels through which political uncertainty affects the credit risk of individual firm.
Keywords: Political Uncertainty; National Elections; Credit Risk; Idiosyncratic Volatility; Rollover Risk
JEL Classification: E44, E63, G18, G32, G33
Suggested Citation: Suggested Citation