Firm-level Political Risk and Credit Markets
70 Pages Posted: 12 Jun 2019 Last revised: 2 Aug 2022
Date Written: July 4, 2022
We take advantage of a new 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 causally 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. Furthermore, we introduce new text-based methods to understand the distinct sources of political risk to lenders and borrowers and provide textual evidence of the transmission of political risk from lenders to borrowers. Our analysis allows for endogenous matching between lenders and borrowers and indicates the role of network effects in diffusing political risk throughout the economy.
Keywords: credit markets; political risk; financial institutions; earnings calls
JEL Classification: G10, G12, G18, G21, M41, P16
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