The Choice between Public versus Private Debt and Political Uncertainty
44 Pages Posted: 29 Apr 2017
Date Written: April 28, 2017
Abstract
In this paper, we study the effect of political uncertainty on the choice of debt source. Specifically, we examine whether national elections, which aggravates information asymmetry leads to a high degree of reliance on bank debt. Our results show that firms substitute away from public debt toward bank debt during election years. This finding is robust to a battery of sensitivity tests. We also find that the positive relationship between national elections and bank debt ratio is more pronounced in opaque firms and financially constrained firms, respectively. Furthermore, we find that the positive association between national elections and the degree of reliance on bank debt is more profound in firms from countries with stronger (weaker) shareholder rights (labor protection and creditor rights). Finally, we document that firms tend to use more bank debt when elections are closely contested and in countries with stronger constraints on the government.
Keywords: Bank Debt, Public Debt, National Election, Political Uncertainty
JEL Classification: D72, D81, G24, G32
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