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

Abstract

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.