Policy Uncertainty and Corporate Credit Spreads

87 Pages Posted: 11 Mar 2017 Last revised: 15 Jan 2020

See all articles by Mahsa Kaviani

Mahsa Kaviani

Temple University - Department of Finance

Lawrence Kryzanowski

Concordia University, Quebec - John Molson School of Business

Hosein Maleki

Temple University, Fox School of Business

Pavel G. Savor

DePaul University - Kellstadt Graduate School of Business

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). Fox School of Business Research Paper No. 17-020. Available at SSRN: https://ssrn.com/abstract=2930126 or http://dx.doi.org/10.2139/ssrn.2930126

Mahsa Kaviani

Temple University - Department of Finance ( email )

Fox School of Business and Management
Philadelphia, PA 19122
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)

Temple University, Fox School of Business ( email )

Philadelphia, PA 19122
United States

Pavel G. Savor

DePaul University - Kellstadt Graduate School of Business ( email )

1 E. Jackson Blvd.
Chicago, IL
United States

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