Political Connections, Government Procurement Contracts, and the Cost of Debt

64 Pages Posted: 2 Aug 2017 Last revised: 19 Jan 2018

See all articles by Reza Houston

Reza Houston

Indiana State University

David A. Maslar

University of Tennessee, Knoxville - Department of Finance; University of Tennessee, Knoxville - College of Business Administration

Kuntara Pukthuanthong

University of Missouri, Columbia

Date Written: January 18, 2018

Abstract

This paper shows that while a firm’s percent of sales to the government is positively related to the firm’s costs of debt, firms are able to offset this effect through political connections. Politically connected government contractors have lower costs of debt than non-connected contractors. Capital expenditure, R&D expense, and volatility of cash flows are all underlying explanatory mechanisms. Our results thus indicate that the documented benefits that accrue to shareholders of connected firms transfer to bondholders as well. Our results contribute to a better understanding of the overall effects of political connections and the determinants of the cost of debt.

Keywords: government contracting, political connections, cost of debt

JEL Classification: G38, G18, G31

Suggested Citation

Houston, Reza and Maslar, David A. and Pukthuanthong, Kuntara, Political Connections, Government Procurement Contracts, and the Cost of Debt (January 18, 2018). Available at SSRN: https://ssrn.com/abstract=3011691 or http://dx.doi.org/10.2139/ssrn.3011691

Reza Houston (Contact Author)

Indiana State University ( email )

Terre Haute, IN 47809
United States
(812) 241-2395 (Phone)

HOME PAGE: http://www.indstate.edu/faculty-staff/reza-houston

David A. Maslar

University of Tennessee, Knoxville - Department of Finance ( email )

Knoxville, TN 37996
United States

University of Tennessee, Knoxville - College of Business Administration ( email )

453 Haslam Business Building
Knoxville, TN 37996
United States

Kuntara Pukthuanthong

University of Missouri, Columbia ( email )

Robert J. Trulaske, Sr. College of Business
403 Cornell Hall
Columbia, MO 65211
United States
6198076124 (Phone)

HOME PAGE: http://https://kuntara.weebly.com

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