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Policy uncertainty and corporate credit spreads

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  • Kaviani, Mahsa S.
  • Kryzanowski, Lawrence
  • Maleki, Hosein
  • Savor, Pavel

Abstract

We find a significant positive relation between changes in policy uncertainty and changes in credit spreads. Macroeconomic conditions, including general uncertainty, do not explain this result, which also holds when we use instrumental variables to address endogeneity issues. The impact of policy uncertainty is greater for firms that operate in regulation-intensive industries, face high tax rates, or are dependent on government spending. It is also stronger for firms that engage in political activities or rely on external financing. We conclude that policy uncertainty has a significant effect on firms’ borrowing costs, with exposure to government policies representing an important channel.

Suggested Citation

  • Kaviani, Mahsa S. & Kryzanowski, Lawrence & Maleki, Hosein & Savor, Pavel, 2020. "Policy uncertainty and corporate credit spreads," Journal of Financial Economics, Elsevier, vol. 138(3), pages 838-865.
  • Handle: RePEc:eee:jfinec:v:138:y:2020:i:3:p:838-865
    DOI: 10.1016/j.jfineco.2020.07.001
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    More about this item

    Keywords

    Credit spreads; Policy uncertainty; Regulation;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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