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Political uncertainty and bank loan contracting

Bill B. Francis, Iftekhar Hasan () and Yun Zhu

Journal of Empirical Finance, 2014, vol. 29, issue C, 281-286

Abstract: Given that political uncertainty greatly impacts firm level investment decisions, this paper examines whether and how political uncertainty influences a firm's cost of bank loans. We create a novel measurement of individual firm's exposure to political uncertainty and find that fluctuations in the political environment impose additional costs on the loan contract. Economically, a one standard deviation increase in a firm's idiosyncratic political exposure is related to 11.90 basis points of additional spreads. In addition, related lenders have an information advantage in pricing a borrower's future political exposure, while non-related lenders do not have such an advantage. On the supply side, lenders with higher political exposure also request additional loan spreads.

Keywords: Political uncertainty; Cost of capital; Bank loan (search for similar items in EconPapers)
JEL-codes: G21 G28 G32 P16 (search for similar items in EconPapers)
Date: 2014
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Journal of Empirical Finance is currently edited by R. T. Baillie, F. C. Palm, Th. J. Vermaelen and C. C. P. Wolff

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Handle: RePEc:eee:empfin:v:29:y:2014:i:c:p:281-286