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Political Environment, Financial Intermediation Costs, and Financing Patterns

58 Pages Posted: 20 Mar 2017  

Ali Gungoraydinoglu

Florida International University (FIU)

Gonul Colak

Hanken School of Economics

Özde Öztekin

Florida International University (FIU)

Date Written: March 17, 2017

Abstract

Political environment is an important determinant of financial intermediation costs, which eventually affects the external financing patterns of firms. Political gyrations create policy uncertainty, which increases the information risk, weakens the investor demand, and reduces the offer size. This raises the securities’ placement costs for the financial intermediaries, who pass on these costs to the issuing firms in the form of higher underwriter spreads. The issuance costs for new equity and debt capital increase, leading to lower leverage. Simultaneous equation analysis of financing, investment, and cash policies reveals that this channel is distinct from previously documented effects of policy uncertainty on corporate outcomes.

Keywords: Elections; External Financing; Information Risk; Institutions; International; Leverage; Policy Uncertainty; Financial Intermediation; Issuance Costs

JEL Classification: G30; G32; G35

Suggested Citation

Gungoraydinoglu, Ali and Colak, Gonul and Öztekin, Özde, Political Environment, Financial Intermediation Costs, and Financing Patterns (March 17, 2017). Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2934936

Ali Gungoraydinoglu

Florida International University (FIU) ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Gonul Colak

Hanken School of Economics ( email )

P.O. Box 479
FI-00101 Helsinki, 00101
Finland

Özde Öztekin (Contact Author)

Florida International University (FIU) ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

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