Political uncertainty and bank loan contracting

Given that political uncertainty greatly impacts firm level investment decisions, this paper examines whether and how political uncertainty influences a firm's cost of bank loans. We create a novel measurement of individual firm's exposure to political uncertainty and find that fluctuation...

Full description

Saved in:
Bibliographic Details
Published in:Journal of empirical finance 2014-12, Vol.29, p.281-286
Main Authors: Francis, Bill B., Hasan, Iftekhar, Zhu, Yun
Format: Article
Language:English
Subjects:
Bank loan
Bank loans
Cost of capital
Investment decision
Political uncertainty
Pricing
Uncertainty
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Given that political uncertainty greatly impacts firm level investment decisions, this paper examines whether and how political uncertainty influences a firm's cost of bank loans. We create a novel measurement of individual firm's exposure to political uncertainty and find that fluctuations in the political environment impose additional costs on the loan contract. Economically, a one standard deviation increase in a firm's idiosyncratic political exposure is related to 11.90 basis points of additional spreads. In addition, related lenders have an information advantage in pricing a borrower's future political exposure, while non-related lenders do not have such an advantage. On the supply side, lenders with higher political exposure also request additional loan spreads. •Political uncertainty influences the cost of debt and bank loan contracting.•Political uncertainty affects the loan contract at aggregate and firm level.•Related lenders are able to price borrowers' potential political exposure.•Lenders with higher political exposure offer loans with higher spread.
ISSN:0927-5398
1879-1727
DOI:10.1016/j.jempfin.2014.08.004