Firm-level political risk and distance-to-default

Md Shahidul Islam, Md Samsul Alam, Shehub Bin Hasan and Sabur Mollah

Journal of Financial Stability, 2022, vol. 63, issue C

Abstract: This study provides the first empirical evidence of the relationship between firm-level political risk and distance-to-default. Based on our examination of a quarterly dataset of 2727 U.S. firms covering a period from January 2002 to April 2019, we conclude that firm-level political risk is negatively associated with distance-to-default. We document three economic mechanisms through which political risk increases default risk: information asymmetry, organizational capital, and investment growth. The evidence indicates that the association is more pronounced for firms with low analysts’ forecast accuracy, organizational capital, and investment growth. Employing hand-collected data, we also reveal that firms are able to exploit their corporate lobbying to immunize themselves against default risk. Our findings are robust to different endogeneity identifications, including a natural experiment, alternative distance-to-default proxies, and different sub-samples. Overall, we present novel evidence of an adverse impact of firm-level political risk on distance-to-default and how such a negative effect can be mitigated.

Keywords: Political risk; Distance-to-default; Information asymmetry; Organizational capital; Investment growth; Corporate lobbying (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (6)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finsta:v:63:y:2022:i:c:s1572308922001036

DOI: 10.1016/j.jfs.2022.101082

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