Firm-level Political Risk and Credit Markets

58 Pages Posted: 12 Jun 2019 Last revised: 16 Mar 2021

See all articles by Mahmoud Gad

Mahmoud Gad

Lancaster University - Lancaster University Management School

Valeri V. Nikolaev

University of Chicago Booth School of Business

Ahmed Tahoun

London Business School

Laurence van Lent

Frankfurt School of Finance and Management

Date Written: April 29, 2019

Abstract

We study two effects of firm-level political risk on debt markets. First, we take advantage of a new measure of political risk (Hassan et al. (2019) and the redrawing of US congressional districts to uncover plausibly exogenous variation in firm-level political risk. We show that changes in borrowers’ level of political risk lead to changes in interest rates set by lenders. Second, we test for the transmission of political risk among economic agents. We predict and find that lender-level political risk propagates to borrowers through lending relationships, which highlights the role of network effects in diffusing risk throughout the economy.

Keywords: credit markets, political risk, financial institutions

JEL Classification: G21, G18, P16

Suggested Citation

Gad, Mahmoud and Nikolaev, Valeri V. and Tahoun, Ahmed and van Lent, Laurence, Firm-level Political Risk and Credit Markets (April 29, 2019). Available at SSRN: https://ssrn.com/abstract=3395266 or http://dx.doi.org/10.2139/ssrn.3395266

Mahmoud Gad (Contact Author)

Lancaster University - Lancaster University Management School ( email )

Accounting and Finance Department,
LUMS,
Bailrigg Lancaster, LA1 4YX
United Kingdom

Valeri V. Nikolaev

University of Chicago Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/valeri.nikolaev/index.html

Ahmed Tahoun

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Laurence Van Lent

Frankfurt School of Finance and Management ( email )

Adickesallee 32-34
Frankfurt am Main, 60322
Germany

HOME PAGE: http://www.laurencevanlent.org

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