Firm-level Political Risk and Credit Markets

63 Pages Posted: 12 Jun 2019 Last revised: 24 Mar 2020

See all articles by Mahmoud Gad

Mahmoud Gad

Lancaster University - Lancaster University Management School

Valeri V. Nikolaev

University of Chicago Booth School of Business

Ahmed Tahoun

London Business School

Laurence van Lent

Frankfurt School of Finance & Management gemeinnützige GmbH - Accounting Department

Date Written: March 10, 2020

Abstract

We examine the effect of firm-level political risk on debt markets. While prior research relies mainly on economy-wide proxies for political risk, Hassan et al. (2019) suggests that a substantial amount of political risk plays out at the firm-level. We use their measure to show that borrower-level political risk is reflected in the cost and liquidity of public debt, the cost of private debt, as well as in debt issuance decisions. We address challenges to a causal interpretation of these findings by using exogenous variation in the political risk of firms caused by the redrawing of electoral district boundaries after the decennial census of 2010. Furthermore, we show that lender-level political risk influences the supply of credit and of loan pricing. Taking advantage of the granularity of the political risk measure, we also show that lender-specific changes in political risk propagate to borrowers and co-lenders, suggesting the importance of network effects in amplifying the effects of political uncertainty. Finally, our evidence suggests that borrowers and lenders can mitigate the effects of political risk through political activism and through contract design.

Keywords: credit markets, political risk, financial institutions

JEL Classification: G21, G18, P16

Suggested Citation

Gad, Mahmoud and Nikolaev, Valeri V. and Tahoun, Ahmed and van Lent, Laurence, Firm-level Political Risk and Credit Markets (March 10, 2020). Available at SSRN: https://ssrn.com/abstract=3395266 or http://dx.doi.org/10.2139/ssrn.3395266

Mahmoud Gad (Contact Author)

Lancaster University - Lancaster University Management School ( email )

Accounting and Finance Department,
LUMS,
Bailrigg Lancaster, LA1 4YX
United Kingdom

Valeri V. Nikolaev

University of Chicago Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/valeri.nikolaev/index.html

Ahmed Tahoun

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Laurence Van Lent

Frankfurt School of Finance & Management gemeinnützige GmbH - Accounting Department ( email )

Adickesallee 32-34
Frankfurt, 60322
Germany
+4969154008531 (Phone)

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