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

See all articles by Jinyu Liu

Jinyu Liu

University of International Business and Economics (UIBE) - School of Banking and Finance

Rui Zhong

The University of Western Australia - UWA Business School

Date Written: February 18, 2017

Abstract

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

Liu, Jinyu and Zhong, Rui, Political Uncertainty and a Firm’s Credit Risk: Evidence from the International CDS Market (February 18, 2017). Journal of Financial Stability, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2485755 or http://dx.doi.org/10.2139/ssrn.2485755

Jinyu Liu

University of International Business and Economics (UIBE) - School of Banking and Finance ( email )

No.10, Huixindong Street, Chaoyang District
Beijing, 100029
China
+8613720001753 (Phone)

HOME PAGE: http://mzttd.club/liujinyu.html

Rui Zhong (Contact Author)

The University of Western Australia - UWA Business School ( email )

35 Stirling Highway
Crawley, Western Australia 6009
Australia

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