Political uncertainty and a firm's credit risk: Evidence from the international CDS market |
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Institution: | 1. Robeco, Investment Research, Coolsingel 120, 3011 AG Rotterdam, The Netherlands;2. Erasmus University Rotterdam, Erasmus School of Economics, Burgemeester Oudlaan 50, 3062 PA Rotterdam, The Netherlands |
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Abstract: | Using a large sample of firms with single-name credit default swap (CDS) contracts in 30 countries, we document the evidence that political uncertainty, proxied by national election dummy, is positively related to firm-level credit risk. Specifically, this positive relation is more pronounced for the firms that have no political connection or poor international diversification, and in the countries with higher political uncertainty and lower investor protections. Further, by using a difference-in-differences approach, we find evidence to support idiosyncratic volatility and debt rollover channels through which political uncertainty affects the credit risk of individual firm. |
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Keywords: | Political uncertainty National elections Credit risk Idiosyncratic volatility Rollover risk |
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