Does Political Uncertainty Increase External Financing Costs? Measuring the Electoral Premium in Syndicated Lending

Olivia S. Kim

Journal of Financial and Quantitative Analysis, 2019, vol. 54, issue 5, 2141-2178

Abstract: This article investigates the impact of political uncertainty on contractual lending terms using a large sample of syndicated loans and a within-firm estimation approach to achieve identification. Firms pay 7 basis points (bps) more on loans originated when their lenders are undergoing an election relative to when their lenders are not undergoing an election. Lenders from less financially developed countries are more likely to pass political uncertainty costs to borrowers. Consistent with electoral uncertainty driving this premium, the most contested elections have the largest impact (17 bps). Overall, political uncertainty leads to a tangible increase in firms’ financing costs.

Date: 2019
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