This study investigates the effects of political uncertainty (PU) on corporate debt maturity and leverage using a novel measure of firm-specific PU.
We find that PU is negatively associated with debt maturity and leverage. Furthermore, the negative effects of PU on debt maturity and leverage are more pronounced for firms with greater investment reversibility and a lower credit rating.
PU affects debt maturity and leverage at least five quarters into the future. Both domestic PU and global PU have negative effects on debt maturity and leverage, but domestic PU’s effect is greater.
Overall, our results suggest that PU deteriorates the external financing environment, leading to firms using more short-term debt and having lower leverage.
Using the novel political risk measures developed by Hassan et al. (2017),
this study investigates the potential effects of PU on the debt maturity structure and leverage of U.S. firms from 2001 to 2016.
It documents the first evidence that PU is an important determinant of the debt structure and leverage of firms.
We find evidence of a negative relation between PU and long-term debt ratio and leverage ratio.
These results show that both debt maturity and leverage are negatively related to PU.
The evidence is robust to subsample analysis, controlling economic conditions, considering endogeneity problems, and firm characteristics. Further analysis indicates that the negative relationship between long-term debt and PU significantly persists for at least eight quarters.
The negative leverage-PU relationship persists for seven quarters, with a peak at the fifth quarter.
The negative effects of PU are stronger for firms with a low rating, which is consistent with the explanation of the supply-side channel. We also consider various types of PU effects.
Comparing domestic and global PU, we find that domestic PU matters more for firms’ debt financing decisions, and we observe that global economic PU has a negative but insignificant impact on debt maturity.
Nevertheless, global PU might have the opposite effect on leverage compared to domestic PU.
For topic-based PU, long term debt ratio is negatively related to most types of PU, especially healthcare-related PU.
Tax PU is the only exception in that it does not have a strong relationship with debt maturity
PU related to technology, trade policy, and environment is strongly negatively associated with leverage.