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Political Contributions and the Price of Credit Risk: Evidence from Credit Default Swaps

Author

Listed:
  • Shunlan Fang

    (Kent State University)

  • Paul Hanouna

    (Villanova University [USA])

  • Alexei Ovtchinnikov

    (HEC Paris - Ecole des Hautes Etudes Commerciales)

  • Saumya Prabhat

    (Indian School of Business)

Abstract

Firm political contributions are associated with lower credit default swap spreads for contributing firms. To address endogeneity, we employ novel instruments and use a set of exogenous events on campaign contribution restrictions: (a) the passage of the Bipartisan Campaign Reform Act (BCRA) that banned soft money contributions, (b) the Federal Election Commission decision to interpret the BCRA less strictly, (c) the partial reversal of the BCRA and, (d) the McConnell v. FEC Supreme Court decision, which upheld the BCRA. Overall, the evidence suggests that political contributions are valued by credit market participants.

Suggested Citation

  • Shunlan Fang & Paul Hanouna & Alexei Ovtchinnikov & Saumya Prabhat, 2017. "Political Contributions and the Price of Credit Risk: Evidence from Credit Default Swaps," Working Papers hal-01941524, HAL.
    • Handle: RePEc:hal:wpaper:hal-01941524
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    Cited by:

    1. Child, Travers Barclay & Massoud, Nadia & Schabus, Mario & Zhou, Yifan, 2021. "Surprise election for Trump connections," Journal of Financial Economics, Elsevier, vol. 140(2), pages 676-697.

    More about this item

    Keywords

    Political Contributions; Credit Risk; CDS; Moral Hazard; Financial Crisis;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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