Political rights and the cost of debt

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review

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Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)202-226
Journal / PublicationJournal of Financial Economics
Volume95
Issue number2
Publication statusPublished - Feb 2010
Externally publishedYes

Abstract

We examine the impact of country-level political rights on the cost of debt for corporate bonds issued by firms incorporated in 39 countries. Similar to, but separate from, the relation for creditor rights, greater political rights are associated with lower yield spreads. A one standard deviation increase in political rights is associated with an 18.6% decline in bond spreads. We find evidence that political and legal institutions are substitutes; marginal improvements in political rights produce greater reductions in the cost of debt for firms from countries with weaker creditor rights. We examine potential factors through which political rights may affect the cost of debt and find that greater freedom of the press provides an important channel for reducing bond risks. Moreover, debt of firms with cross-listed equity trades at a premium in U.S. markets, but this relation appears to be more consistent with improved visibility than with bonding effects. © 2009 Elsevier B.V. All rights reserved.

Research Area(s)

  • Cost of debt, Creditor rights, Cross-listing, Freedom of the press, Political institutions

Citation Format(s)

Political rights and the cost of debt. / Qi, Yaxuan; Roth, Lukas; Wald, John K.
In: Journal of Financial Economics, Vol. 95, No. 2, 02.2010, p. 202-226.

Research output: Journal Publications and ReviewsRGC 21 - Publication in refereed journalpeer-review