Firm-level Political Risk and Credit Markets

73 Pages Posted: 12 Jun 2019 Last revised: 6 Sep 2023

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 and Management

Multiple version iconThere are 2 versions of this paper

Date Written: July 17, 2023

Abstract

We take advantage of a new composite measure of political risk (Hassan et al., 2019) to study the effects of firm-level political risk on private debt markets. First, we use panel data tests and exploit the redrawing of US congressional districts to uncover plausibly exogenous variation in firm-level political risk. We show that borrowers’ political risk is linked to interest rates set by lenders. Second, we test for the transmission of political risk from lenders to borrowers. We predict and find that lender-level political risk propagates to borrowers through lending relationships. Our analysis allows for endogenous matching between lenders and borrowers and indicates the presence of network effects in diffusing political risk throughout the economy. Finally, we introduce new text-based methods to analyze the distinct sources of political risk to lenders and borrowers and provide textual evidence of the transmission of political risk from lenders to borrowers.

Keywords: credit markets; political risk; financial institutions; earnings calls

JEL Classification: G10, G12, G18, G21, M41, P16

Suggested Citation

Gad, Mahmoud and Nikolaev, Valeri V. and Tahoun, Ahmed and van Lent, Laurence, Firm-level Political Risk and Credit Markets (July 17, 2023). Journal of Accounting & Economics (JAE), Vol. 77, No. 1, 2024, 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 and Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

HOME PAGE: http://www.laurencevanlent.org

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