Policy Uncertainty and Corporate Credit Spreads

87 Pages Posted: 11 Mar 2017 Last revised: 15 Jun 2021

See all articles by Mahsa Kaviani

Mahsa Kaviani

University of Delaware

Lawrence Kryzanowski

Concordia University, Quebec - John Molson School of Business

Hosein Maleki

Florida State University - College of Business

Pavel G. Savor

DePaul University - Kellstadt Graduate School of Business; affiliation not provided to SSRN

Date Written: March 1, 2017

Abstract

We find a significant positive relation between changes in policy uncertainty and changes in credit spreads. Macroeconomic conditions, including general uncertainty, do not explain this result, which also holds when we use instrumental variables to address endogeneity issues. Policy uncertainty consistently emerges as one of the most important determinants of variation in spreads. Its impact is greater for firms that are more exposed to government policies, such as those operating in regulation-intensive industries, paying high effective tax rates, and dependent on government spending. It is also stronger for firms that engage in political activities, and for those that are more dependent on external financing. We conclude that policy uncertainty has a significant effect on firms' borrowing costs, with exposure to government policies representing an important channel.

Keywords: credit spreads, policy uncertainty, regulation

JEL Classification: G12, G18, G38

Suggested Citation

Kaviani, Mahsa and Kryzanowski, Lawrence and Maleki, Hosein and Savor, Pavel G., Policy Uncertainty and Corporate Credit Spreads (March 1, 2017). Journal of Financial Economics (JFE), Vol. 138, No. 3, 2020, Available at SSRN: https://ssrn.com/abstract=2930126 or http://dx.doi.org/10.2139/ssrn.2930126

Mahsa Kaviani

University of Delaware ( email )

20 Orchard Rd, Newark, DE
Newark, DE 19716
United States

Lawrence Kryzanowski

Concordia University, Quebec - John Molson School of Business ( email )

1455 de Maisonneuve Blvd. W.
Montreal, Quebec H3G 1M8
Canada

Hosein Maleki (Contact Author)

Florida State University - College of Business ( email )

423 Rovetta Business Building
Tallahassee, FL 32306-1110
United States

Pavel G. Savor

DePaul University - Kellstadt Graduate School of Business ( email )

1 E. Jackson Blvd.
Chicago, IL
United States

affiliation not provided to SSRN

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