Political Contributions and the Price of Credit Risk: Evidence from Credit Default Swaps

53 Pages Posted: 22 Aug 2017 Last revised: 22 Jan 2019

See all articles by Shunlan Fang

Shunlan Fang

Kent State University

Paul Hanouna

Villanova University - School of Business

Alexei V. Ovtchinnikov

HEC Paris - Finance Department

Saumya Prabhat

Indian School of Business (ISB), Hyderabad

Date Written: August 18, 2017

Abstract

Firm political contributions are associated with lower credit default swap spreads for contributing firms. To address endogeneity, we employ novel instruments and use a set of exogenous events on campaign contribution restrictions: (a) the passage of the Bipartisan Campaign Reform Act (BCRA) that banned soft money contributions, (b) the Federal Election Commission decision to interpret the BCRA less strictly, (c) the partial reversal of the BCRA and, (d) the McConnell v. FEC Supreme Court decision, which upheld the BCRA. Overall, the evidence suggests that political contributions are valued by credit market participants.

Keywords: Political Contributions, Credit Risk, CDS, Moral Hazard, Financial Crisis

JEL Classification: D72, G18, G20, G24, G28, G32

Suggested Citation

Fang, Shunlan and Hanouna, Paul E. and Ovtchinnikov, Alexei V. and Prabhat, Saumya, Political Contributions and the Price of Credit Risk: Evidence from Credit Default Swaps (August 18, 2017). HEC Paris Research Paper No. FIN-2017-1222. Available at SSRN: https://ssrn.com/abstract=3022092 or http://dx.doi.org/10.2139/ssrn.3022092

Shunlan Fang

Kent State University ( email )

Kent, OH 44242
United States

Paul E. Hanouna (Contact Author)

Villanova University - School of Business ( email )

800 Lancaster Avenue
Villanova, PA 19085-1678
United States

Alexei V. Ovtchinnikov

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France

Saumya Prabhat

Indian School of Business (ISB), Hyderabad ( email )

Hyderabad, Gachibowli 500 019
India

Register to save articles to
your library

Register

Paper statistics

Downloads
93
rank
272,907
Abstract Views
832
PlumX Metrics