Firm-level Political Risk and Credit Markets

45 Pages Posted: 12 Jun 2019

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: May 28, 2019

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 (such as the economic policy uncertainty index), Hassan et al. [2019] suggests that a substantial part of political risk plays out at the firm-level. We use their measure of political risk to show that borrower-level political risk is reflected in the pricing and liquidity of public debt, the cost of private debt, and credit default swap spreads and recovery rates. We also document the strength of pricing effects for persistent versus temporary variation in firm-level political risk.Furthermore, we show that lender-level political risk influences the supply of credit and has a significant effect on loan pricing. Taking advantage of the granularity of our measure, we also show that firm-specific changes in political risk propagate across firms and lenders, suggesting the importance of network effects in amplifying the effects of political uncertainty. Finally, we show that borrowers and lenders can mitigate the effect of political risk via political activism and through changes to contractual terms.

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 (May 28, 2019). 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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