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

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