Do politically connected firms borrow cheaply? Evidence from two post U.S. election campaigns

ABSTRACT

We shed more light on the effect of corporate political connections on the cost of debt of US firms. Focusing on new public debt issuance and applying a two stages instrumental variable model, we show that despite carrying higher leverage, politically connected firms increased their debt financing at a lower cost than did unconnected firms. Connected firms took advantage of this benefit a short time after contributing to the 2008 and 2012 election campaigns. Further analyses show that the positive effect of leverage on the cost of debt is practically eliminated for politically connected firms, suggesting that these firms are perceived as less risky than unconnected ones.

KEYWORDS:

• Cost of debt
• political connections
• election campaign
• leverage

JEL CLASSIFICATION:

• D72
• G32

Acknowledgments

Imed Chkir acknowledges financial support from the Social Sciences and Humanities Research Council of Canada.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ It is worth noting that some studies highlight how political connections may adversely affect firms (Shleifer and Vishny 1994; Boubakri, El Ghoul, and Saffar 2013).

² This data is gathered from the FEC’s website http://www.fec.gov/.

³ As mentioned by Chaney, Faccio, and Parsley (2011, 73), not all firms issue bonds: ‘Bond issuers in fact tend to be large, mature firms. Additionally, unconnected firms are more likely to have public debt than connected firms, which is consistent with the argument that connected firms shy away from public securities that require more transparency ….’

⁴ We use the original Z-score formula, which is defined as

Z = 1.2 (working capital/total assets) + 1.4 (retained earnings/total assets) + 3.3 (earnings before interest and taxes/total assets) + 0.6 (market value of equity/book value of total liabilities) + 1.0 (sales/total assets).

⁵ For the sake of brevity, we only report the results from the second stage. First stage results are available upon request.

Additional information

Funding

This work was supported by the Social Sciences and Humanities Research Council of Canada.