Policy risk, corporate political strategies, and the cost of debt

Daniel Bradley, Christos Pantzalis and Xiaojing Yuan

Journal of Corporate Finance, 2016, vol. 40, issue C, 254-275

Abstract: We examine how political geography affects firms' cost of debt. Local policy risk, measured by proximity to political power reflected in firms' position in the country's political map, is positively related to firms' cost of debt. Employing a difference-in-difference-in-differences (DDD) estimation around presidential elections, we find that firms headquartered in states that become more aligned with the president after elections are exposed to more policy risk and thus incur higher yield spreads. Firms can manage policy risk by engaging in corporate political strategies. Consistent with the view that such political strategies protect firms against uncertainty about future policies, we find policy risk has less of an impact on a firm's cost of debt when the firm makes more PAC contributions or spends more money on lobbying.

Date: 2016
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Citations: View citations in EconPapers (67)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:40:y:2016:i:c:p:254-275

DOI: 10.1016/j.jcorpfin.2016.08.001

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