Hostname: page-component-78c5997874-mlc7c Total loading time: 0 Render date: 2024-11-15T12:49:18.400Z Has data issue: false hasContentIssue false
  • English
  • Français

Does Political Uncertainty Increase External Financing Costs? Measuring the Electoral Premium in Syndicated Lending

Published online by Cambridge University Press:  12 October 2018

Olivia S. Kim
Get access Rights & Permissions [Opens in a new window]

Abstract

This article investigates the impact of political uncertainty on contractual lending terms using a large sample of syndicated loans and a within-firm estimation approach to achieve identification. Firms pay 7 basis points (bps) more on loans originated when their lenders are undergoing an election relative to when their lenders are not undergoing an election. Lenders from less financially developed countries are more likely to pass political uncertainty costs to borrowers. Consistent with electoral uncertainty driving this premium, the most contested elections have the largest impact (17 bps). Overall, political uncertainty leads to a tangible increase in firms’ financing costs.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 5 , October 2019 , pp. 2141 - 2178
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

1

An earlier draft of this article was circulated under the title “How Costly Is Political Uncertainty? Evidence from Cross-Country Syndicated Lending.” I am especially grateful to Mark Carey for his invaluable guidance. I thank an anonymous referee, Josh Angrist, David Autor, Sudheer Chava, Ricardo Correa, Antonio Falato, Simon Gervais, Ricard Gil, Peter Hull, Paul Malatesta (the editor), Amanda Pallais, Christopher Palmer, Jonathan Parker, Saumya Prabhat (discussant), Philipp Schnabl, Adrien Verdelhan, Heidi Williams, and Youngsuk Yook, who provided useful comments, as did seminar participants at the Finance Forum at the Federal Reserve Board, MIT Sloan School of Management, and the 2014 Society for Financial Studies Cavalcade.

References

Angrist, J. D., and Pischke, J.-S.. Mostly Harmless Econometrics: An Empiricist’s Companion. Princeton, NJ: Princeton University Press (2009).Google Scholar
Arellano, C.; Bai, Y.; and Kehoe, P. J.. “Financial Frictions and Fluctuations in Volatility.” Federal Reserve Bank of Minneapolis Research Department Staff Report (2012).Google Scholar
Baker, S. R., and Bloom, N.. “Does Uncertainty Reduce Growth? Using Disasters as Natural Experiments.” NBER Working Paper 19475 (2013).Google Scholar
Baker, S. R.; Bloom, N.; and Davis, S. J.. “Measuring Economic Policy Uncertainty.” Quarterly Journal of Economics, 131 (2016), 1593–1636.Google Scholar
Beck, T.; Demirgüç-Kunt, A.; and Levine, R.. “Financial Institutions and Markets Across Countries and Over Time: The Updated Financial Development and Structure Database.” The World Bank Economic Review, 24 (2010), 77–92.Google Scholar
Berlin, M., and Mester, L. J.. “Deposits and Relationship Lending.” Review of Financial Studies, 12 (1999), 579–607.Google Scholar
Bernanke, B. S.“Irreversibility, Uncertainty, and Cyclical Investment.” Quarterly Journal of Economics, 98 (1983), 85–106.Google Scholar
Bernanke, B. S.; Gertler, M.; and Gilchrist, S.. “The Financial Accelerator in a Quantitative Business Cycle Framework.” Handbook of Macroeconomics, 1, Part C (1999), 1341–1393.Google Scholar
Bialkowski, J.; Gottschalk, K.; and Wisniewski, T. P.. “Stock Market Volatility Around National Elections.” Journal of Banking and Finance, 32 (2008), 1941–1953.Google Scholar
Bloom, N.“The Impact of Uncertainty Shocks.” Econometrica, 77 (2009), 623–685.Google Scholar
Bloom, N.“Fluctuations in Uncertainty.” Journal of Economic Perspectives, 28 (2014), 153–176.Google Scholar
Boot, A. W.; Greenbaum, S. I.; and Thakor, A. V.. “Reputation and Discretion in Financial Contracting.” American Economic Review, 83 (1993), 1165–1183.Google Scholar
Boutchkova, M.; Doshi, H.; Durnev, A.; and Molchanov, A.. “Precarious Politics and Return Volatility.” Review of Financial Studies, 25 (2012), 1111–1154.Google Scholar
Carey, M., and Nini, G.. “Is the Corporate Loan Market Globally Integrated? A Pricing Puzzle.” Journal of Finance, 62 (2007), 2969–3007.Google Scholar
Caughey, D., and Sekhon, J. S.. “Elections and the Regression Discontinuity Design: Lessons from Close US House Races, 1942–2008.” Political Analysis, 19 (2011), 385–408.Google Scholar
Chava, S., and Roberts, M. R.. “How Does Financing Impact Investment? The Role of Debt Covenants.” Journal of Finance, 63 (2008), 2085–2121.Google Scholar
Chodorow-Reich, G.“The Employment Effects of Credit Market Disruptions: Firm-Level Evidence from the 2008-9 Financial Crisis.” Quarterly Journal of Economics, 129 (2014), 1–59.Google Scholar
Christiano, L. J.; Motto, R.; and Rostagno, M.. “Risk Shocks.” American Economic Review, 104 (2014), 27–65.Google Scholar
Diermeier, D., and Merlo, A.. “An Empirical Investigation of Coalition Bargaining Procedures.” Journal of Public Economics, 88 (2004), 783–797.Google Scholar
Djankov, S.; Hart, O.; McLiesh, C.; and Shleifer, A.. “Debt Enforcement Around the World.” Journal of Political Economy, 116 (2008), 1105–1150.Google Scholar
Do, Q.-A.; Lee, Y.-T.; and Nguyen, B. D.. “Political Connections and Firm Value: Evidence from Regression Discontinuity Design of Close Gubernatorial Elections.” Working Paper, Sciences Po publications 15 (2015).Google Scholar
Douglas, D.“For Wall Street, Obama’s Reelection Means No Dismantling of Dodd-Frank Law.” The Washington Post (Nov. 7, 2012).Google Scholar
Durnev, A.“The Real Effects of Political Uncertainty.” Working Paper, McGill University (2011).Google Scholar
Falato, A., and Liang, N.. “Do Creditor Rights Increase Employment Risk? Evidence from Debt Covenants.” Journal of Finance, 71 (2016), 2545–2590.Google Scholar
Fernández-Villaverde, J.; Guerrón-Quintana, P.; Kuester, K.; and Rubio-Ramírez, J.. “Fiscal Volatility Shocks and Economic Activity.” American Economic Review, 105 (2015), 3352–3384.Google Scholar
Gao, P., and Qi, Y.. “Political Uncertainty and Public Financing Costs: Evidence from U. S. Municipal Bond Markets.” SSRN Working Paper (2013).Google Scholar
Gilchrist, S.; Sim, J. W.; and Zakrajs̆ek, E.. “Uncertainty, Financial Frictions, and Investment Dynamics.” NBER Working Paper 20038 (2014).Google Scholar
Ivashina, V.“Asymmetric Information Effects on Loan Spreads.” Journal of Financial Economics, 92 (2009), 300–319.Google Scholar
Ivashina, V., and Scharfstein, D.. “Bank Lending During the Financial Crisis of 2008.” Journal of Financial Economics, 97 (2010), 319–338.Google Scholar
Julio, B., and Yook, Y.. “Political Uncertainty and Corporate Investment Cycles.” Journal of Finance, 67 (2012), 45–83.Google Scholar
Julio, B., and Yook, Y.. “Policy Uncertainty, Irreversibility, and Cross-Border Flows of Capital.” Journal of International Economics, 103 (2016), 13–26.Google Scholar
Kelly, B.; Pástor, Ľ.; and Veronesi, P.. “The Price of Political Uncertainty: Theory and Evidence from the Option Market.” Journal of Finance, 71 (2016), 2417–2480.Google Scholar
Khwaja, A. I., and Mian, A.. “Do Lenders Favor Politically Connected Firms? Rent Provision in an Emerging Financial Market.” Quarterly Journal of Economics, 120 (2005), 1371–1411.Google Scholar
Khwaja, A. I., and Mian, A.. “Tracing the Impact of Bank Liquidity Shocks: Evidence from an Emerging Market.” American Economic Review, 98 (2008), 1413–1442.Google Scholar
LaPorta, R.; Lopez-de-Silanes, F.; Shleifer, A.; and Vishny, R. W.. “Law and Finance.” Journal of Political Economy, 106 (1998), 1113–1155.Google Scholar
Lerner, J., and Schoar, A.. “Does Legal Enforcement Affect Financial Transactions? The Contractual Channel in Private Equity.” Quarterly Journal of Economics, 120 (2005), 223–246.Google Scholar
Liberti, J. M., and Mian, A. R.. “Collateral Spread and Financial Development.” Journal of Finance, 65 (2010), 147–177.Google Scholar
Murfin, J.“The Supply-Side Determinants of Loan Contract Strictness.” Journal of Finance, 67 (2012), 1565–1601.Google Scholar
Pástor, Ľ., and Veronesi, P.. “Uncertainty about Government Policy and Stock Prices.” Journal of Finance, 67 (2012), 1219–1264.Google Scholar
Pástor, Ľ., and Veronesi, P.. “Political Uncertainty and Risk Premia.” Journal of Financial Economics, 110 (2013), 520–545.Google Scholar
Persson, T., and Tabellini, G.. “Democratic Capital: The Nexus of Political and Economic Change.” American Economic Journal: Macroeconomics, 88 (2009), 88–126.Google Scholar
Pinkowitz, L.; Stulz, R.; and Williamson, R.. “Multinationals and the High Cash Holdings Puzzle.” NBER Working Paper 18120 (2012).Google Scholar
Qian, J., and Strahan, P. E.. “How Laws and Institutions Shape Financial Contracts: The Case of Bank Loans.” Journal of Finance, 62 (2007), 2803–2834.Google Scholar
Rajan, R. G.“Insiders and Outsiders: The Choice between Informed and Arm’s-Length Debt.” Journal of Finance, 47 (1992), 1367–1400.Google Scholar
Sharpe, S. A.“Asymmetric Information, Bank Lending and Implicit Contracts: A Stylized Model of Customer Relationships.” Journal of Finance, 45 (1990), 1069–1087.Google Scholar
Sufi, A.“Information Asymmetry and Financing Arrangements: Evidence from Syndicated Loans.” Journal of Finance, 62 (2007), 629–668.Google Scholar