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

Author

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  • Liu, Yanlin
  • Yang, Jiaxin
  • Pham, Thu Phuong

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.

Suggested Citation

  • Liu, Yanlin & Yang, Jiaxin & Pham, Thu Phuong, 2025. "The hidden cost of firm-level political risk: Impairing liquidity in corporate bond markets," Finance Research Letters, Elsevier, vol. 85(PC).
    • Handle: RePEc:eee:finlet:v:85:y:2025:i:pc:s1544612325013169
    DOI: 10.1016/j.frl.2025.108058
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    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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