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Political rights and the cost of debt

Author Info

  • Qi, Yaxuan
  • Roth, Lukas
  • Wald, John K.

Abstract

We examine the impact of country-level political rights on the cost of debt for corporate bonds issued by firms incorporated in 39 countries. Similar to, but separate from, the relation for creditor rights, greater political rights are associated with lower yield spreads. A one standard deviation increase in political rights is associated with an 18.6% decline in bond spreads. We find evidence that political and legal institutions are substitutes; marginal improvements in political rights produce greater reductions in the cost of debt for firms from countries with weaker creditor rights. We examine potential factors through which political rights may affect the cost of debt and find that greater freedom of the press provides an important channel for reducing bond risks. Moreover, debt of firms with cross-listed equity trades at a premium in U.S. markets, but this relation appears to be more consistent with improved visibility than with bonding effects.

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File URL: http://www.sciencedirect.com/science/article/pii/S0304-405X(09)00210-4
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Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 95 (2010)
Issue (Month): 2 (February)
Pages: 202-226

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Handle: RePEc:eee:jfinec:v:95:y:2010:i:2:p:202-226
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

Keywords: Political institutions Creditor rights Cost of debt Freedom of the press Cross-listing;

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