Abstract
We study two effects of firm-level political risk on debt markets. First, we take advantage of a new measure of political risk (Hassan et al. (2019) and the redrawing of US congressional districts to uncover plausibly exogenous variation in firm-level political risk. We show that changes in borrowers’ level of political risk lead to changes in interest rates set by lenders. Second, we test for the transmission of political risk among economic agents. We predict and find that lender-level political risk propagates to borrowers through lending relationships, which highlights the role of network effects in diffusing risk throughout the economy.
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