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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
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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 

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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.

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