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Firm-level political risk and distance-to-default

Islam, M. S., Alam, M. S., Bin Hasan, S. and Mollah, S. (2022) Firm-level political risk and distance-to-default. Journal of Financial Stability, 63. 101082. ISSN 1572-3089

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To link to this item DOI: 10.1016/j.jfs.2022.101082


This study provides the first empirical evidence of the relationship between firm-level political risk and distance-to-default. Based on our examination of a quarterly dataset of 2,727 U.S. firms covering a period from January 2002 to April 2019, we conclude that firm-level political risk is negatively associated with distance-to-default. We document three economic mechanisms through which political risk increases default risk: information asymmetry, organizational capital, and investment growth. The evidence indicates that the association is more pronounced for firms with low analysts’ forecast accuracy, organizational capital, and investment growth. Employing hand-collected data, we also reveal that firms are able to exploit their corporate lobbying to immunize themselves against default risk. Our findings are robust to different endogeneity identifications, including a natural experiment, alternative distance-to-default proxies, and different sub-samples. Overall, we present novel evidence of an adverse impact of firm-level political risk on distance-to-default and how such a negative effect can be mitigated.

Item Type:Article
Divisions:Henley Business School > ICMA Centre
ID Code:108104
Uncontrolled Keywords:Political risk, Distance-to-default, Information asymmetry, Organizational capital, Investment growth, Corporate lobbying.

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