The hidden cost of firm-level political risk: Impairing liquidity in corporate bond markets

Yanlin Liu, Jiaxin Yang and Thu Phuong Pham ()

Finance Research Letters, 2025, vol. 85, issue PC

Abstract: This paper investigates how firm-level political risk affects corporate bond liquidity. Using a large sample of U.S. corporate bonds from 2002 to 2022, we find that higher political risk significantly reduces bond liquidity. The effect is stronger for financially distressed firms, during periods of elevated economic policy uncertainty, and under weak consumer sentiment. It persists across credit ratings but is more pronounced for non-investment-grade bonds. The impact is also greater before the Global Financial Crisis, when macroeconomic intervention was more limited. To address endogeneity, we use terrorist attacks as exogenous shocks to political risk and find consistent evidence supporting causality. These findings position firm-level political risk as a key, underexplored driver of bond market liquidity, enriching the literature on political risk, market functioning, and corporate finance.

Keywords: Firm-level political risk; Corporate bond liquidity; Cost of debt; Secondary Market Trading; Terrorist Attacks (search for similar items in EconPapers)
JEL-codes: G12 G14 G18 G32 (search for similar items in EconPapers)
Date: 2025
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:85:y:2025:i:pc:s1544612325013169

DOI: 10.1016/j.frl.2025.108058

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