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The effect of political uncertainty on the cost of corporate debt

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  • Waisman, Maya
  • Ye, Pengfei
  • Zhu, Yun

Abstract

In this paper we bring new empirical evidence that political uncertainty is associated with higher corporate debt financing costs. Controlling for all bond and firm characteristics that could affect a firm's cost of debt financing, the uncertainty associated with the outcome of U.S. presidential elections leads to a 34 basis point increase in corporate bond spreads, with closer campaign years associated with additional costs. Similar results hold when we use the continuous measure of the Political Uncertainty Index by Baker et al. (2012). The uncertainty associated with gubernatorial elections, on the other hand, has no effect on the pricing of corporate bonds.

Suggested Citation

  • Waisman, Maya & Ye, Pengfei & Zhu, Yun, 2015. "The effect of political uncertainty on the cost of corporate debt," Journal of Financial Stability, Elsevier, vol. 16(C), pages 106-117.
    • Handle: RePEc:eee:finsta:v:16:y:2015:i:c:p:106-117
    DOI: 10.1016/j.jfs.2015.01.002
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    More about this item

    Keywords

    Political uncertainty; Cost of debt; Bond pricing;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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