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Political Uncertainty and Bank Loan Contracts: Does Government Quality Matter?

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  • Yin-Siang Huang

    (Fuzhou University of International Studies and Trade)

  • Iftekhar Hasan

    (Fordham University)

  • Ying-Chen Huang

    (National United University)

  • Chih-Yung Lin

    (National Chiao-Tung University)

Abstract

We investigate the relation between political uncertainty and bank loan spreads using a sample of loan contracts for the G20 firms during the period from 1982 to 2015. We find that banks charge firms higher loan spreads and require more covenants during election years when domestic political risks are elevated. Greater differences in the support ratios of opinion polls on candidates lead to the lower cost of bank loans. This political effect also lessens when the government quality of the borrower’s country is better than that of the lender’s country. Better quality government can lower the political risk component of bank loan spreads.

Suggested Citation

  • Yin-Siang Huang & Iftekhar Hasan & Ying-Chen Huang & Chih-Yung Lin, 2021. "Political Uncertainty and Bank Loan Contracts: Does Government Quality Matter?," Journal of Financial Services Research, Springer;Western Finance Association, vol. 60(2), pages 157-185, December.
    • Handle: RePEc:kap:jfsres:v:60:y:2021:i:2:d:10.1007_s10693-020-00344-7
    DOI: 10.1007/s10693-020-00344-7
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