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

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  • Kim, Olivia S.

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.

Suggested Citation

  • Kim, Olivia S., 2019. "Does Political Uncertainty Increase External Financing Costs? Measuring the Electoral Premium in Syndicated Lending," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 54(5), pages 2141-2178, October.
    • Handle: RePEc:cup:jfinqa:v:54:y:2019:i:05:p:2141-2178_00
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    Cited by:

    1. Çiğdem Vural‐Yavaş, 2021. "Economic policy uncertainty, stakeholder engagement, and environmental, social, and governance practices: The moderating effect of competition," Corporate Social Responsibility and Environmental Management, John Wiley & Sons, vol. 28(1), pages 82-102, January.
    2. Youying Mu & Chengzhuo Duan & Xin Li & Yongbo Wu, 2023. "A Monitoring Method for Corporate Environmental Performance Based on Data Fusion in China under the Double Carbon Target," Sustainability, MDPI, vol. 15(12), pages 1-16, June.
    3. Li, Mangmang & Cao, Yuqiang & Lu, Meiting & Wang, Hongjian, 2021. "Political uncertainty and allocation of decision rights among business groups: Evidence from the replacement of municipal officials," Pacific-Basin Finance Journal, Elsevier, vol. 67(C).
    4. Karavitis, Panagiotis & Kazakis, Pantelis, 2022. "Political sentiment and syndicated loan borrowing costs of multinational enterprises," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 78(C).
    5. Hasan, Iftekhar & Kim, Suk-Joong & Politsidis, Panagiotis N. & Wu, Eliza, 2021. "Loan syndication under Basel II: How do firm credit ratings affect the cost of credit?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 72(C).
    6. Delis, Manthos D. & Politsidis, Panagiotis N. & Sarno, Lucio, 2022. "The cost of foreign-currency lending," Journal of Banking & Finance, Elsevier, vol. 136(C).
    7. Shabir, Mohsin & Jiang, Ping & Bakhsh, Satar & Zhao, Zhongxiu, 2021. "Economic policy uncertainty and bank stability: Threshold effect of institutional quality and competition," Pacific-Basin Finance Journal, Elsevier, vol. 68(C).
    8. Vural-Yavaş, Çiğdem, 2020. "Corporate risk-taking in developed countries: The influence of economic policy uncertainty and macroeconomic conditions," Journal of Multinational Financial Management, Elsevier, vol. 54(C).
    9. M. Kabir Hassan & M. Sydul Karim & Tarun Mukherjee, 2023. "Does corporate diversification retrench the effects of firm‐level political risk?," The Financial Review, Eastern Finance Association, vol. 58(4), pages 663-702, November.
    10. MVK, Jagannath & Maitra, Debasish, 2023. "Do election cycles, political stability, and government effectiveness matter for the risk of banks? Evidence from Indian banks," Journal of Behavioral and Experimental Finance, Elsevier, vol. 39(C).
    11. Biswas, Sonny & Zhai, Wei, 2021. "Economic policy uncertainty and cross-border lending," Journal of Corporate Finance, Elsevier, vol. 67(C).
    12. Tian, Jing & Li, Haiwei & You, Pin, 2022. "Economic policy uncertainty, bank loan, and corporate innovation," Pacific-Basin Finance Journal, Elsevier, vol. 76(C).
    13. Maha Alandejani & Habiba Al-Shaer, 2023. "Macro Uncertainty Impacts on ESG Performance and Carbon Emission Reduction Targets," Sustainability, MDPI, vol. 15(5), pages 1-15, February.
    14. Chen, Yanyan, 2022. "Does political turnover affect corporate investment? Evidence from China," Emerging Markets Review, Elsevier, vol. 51(PA).
    15. Dingzu Zhang & Luqi Liu, 2022. "Does ESG Performance Enhance Financial Flexibility? Evidence from China," Sustainability, MDPI, vol. 14(18), pages 1-22, September.
    16. Cheng, Mengyao, 2022. "Legislative gridlock and stock return dispersion around roll-call votes," Journal of Banking & Finance, Elsevier, vol. 138(C).
    17. Cheng, Maoyong & Geng, Hongyan, 2021. "Do local firms employ political activities to respond to political uncertainty?," Journal of Asian Economics, Elsevier, vol. 73(C).
    18. Wen, Fenghua & Li, Cui & Sha, Han & Shao, Liuguo, 2021. "How does economic policy uncertainty affect corporate risk-taking? Evidence from China," Finance Research Letters, Elsevier, vol. 41(C).
    19. Huang, Guan-Ying & Shen, Carl Hsin-han & Wu, Zhen-Xing, 2023. "Firm-level political risk and debt choice," Journal of Corporate Finance, Elsevier, vol. 78(C).
    20. Anh‐Tuan Doan & Anh‐Tuan Le & Quan Tran, 2020. "Economic uncertainty, ownership structure and small and medium enterprises performance," Australian Economic Papers, Wiley Blackwell, vol. 59(2), pages 102-137, June.
    21. Almaghrabi, Khadija S., 2021. "Borrowing during periods of policy uncertainty: The role of foreign lenders," International Review of Financial Analysis, Elsevier, vol. 77(C).

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