The Effect of Firm-Level Political Uncertainty on Bank Loan Contracting

51 Pages Posted: 4 Apr 2019

See all articles by Walid Saffar

Walid Saffar

Hong Kong Polytechnic University - School of Accounting and Finance

Yang Wang

Hong Kong Polytechnic University

K.C. John Wei

Hong Kong Polytechnic University

Date Written: March 17, 2019

Abstract

We investigate whether and how firm-level political uncertainty affects firms’ bank loan contracting. We find that firms facing higher firm-level political uncertainty are charged higher bank loan costs. This impact is amplified for firms with higher degrees of information asymmetry and firms with more financial constraints. Moreover, we find a positive relationship between the tightness of a loan’s non-pricing terms and the degree of firm-level political uncertainty. Specifically, firms facing higher firm-level political uncertainty are required to accept more contract covenants, general covenants, and financial covenants. Banks also charge higher annual fees for loan borrowers with higher firm-level political uncertainty. Our results are robust to various model specifications.

Keywords: firm-level political uncertainty; bank loan cost; loan covenants

JEL Classification: G21; G32; P16; P26

Suggested Citation

Saffar, Walid and Wang, Yang and Wei, Kuo-Chiang (John), The Effect of Firm-Level Political Uncertainty on Bank Loan Contracting (March 17, 2019). Available at SSRN: https://ssrn.com/abstract=3354246 or http://dx.doi.org/10.2139/ssrn.3354246

Walid Saffar (Contact Author)

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Li Ka Shing Tower
Hong Hum
Kowloon
Hong Kong

Yang Wang

Hong Kong Polytechnic University ( email )

Hong Kong

Kuo-Chiang (John) Wei

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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