Corporate political transparency and the cost of debt
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Corporate political transparency and the cost of debt D. G. DeBoskey1 · Yutao Li2 · Gerald J. Lobo3 · Yan Luo1 Accepted: 1 October 2020 © Springer Science+Business Media, LLC, part of Springer Nature 2020
Abstract We examine the relation between borrowing firms’ corporate political transparency and the cost of debt. Using a sample of S&P 500 firms over the 2012–2016 period, we document a significant negative association between firms’ corporate political transparency and their cost of debt. We also find that the negative association is more pronounced when the borrowing firms are in less unionized industries and have younger executives (CEOs or board of directors). Our results are robust to a variety of sensitivity tests. Keywords Corporate political activities · Corporate political transparency · Cost of debt · Risk taking · Conflict of interest between shareholders and creditors · Syndicated loan market JEL Classification C12 · G30 · M41 · N22
1 Introduction It is well-established that corporate political activities have profound implications for the corporate business environment. Such activities can increase firm value (Ansolabehere et al. 2004; Hill et al. 2013) by enabling corporations to benefit from favorable anti-trust regulations (e.g., Coates et al. 1990; Fidrmuc et al. 2018), gain access to political and regulatory information, and/or win government contracts (e.g., Schuler et al. 2002; Hillman et al. 2004; Goldman et al. 2013). However, political activities can also reduce firm
* D. G. DeBoskey [email protected] Yutao Li [email protected] Gerald J. Lobo [email protected] Yan Luo [email protected] 1
Charles W. Lamden School of Accountancy, San Diego State University, San Diego, USA
2
Faculty of Management, University of Lethbridge, Lethbridge, AB, Canada
3
Bauer College of Business, University of Houston, Houston, USA
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value (Hadani and Schuler 2013), as corporate managers may use corporate resources to advance their own political agenda (Coates 2010; Aggarwal et al. 2012), engage in risktaking activities (e.g., Kim and Zhang 2016; Min 2016; Akey and Lewellen 2017), and/ or seek political protection for their shirking behavior or incompetence (Aggarwal et al. 2012). Despite the potentially profound effects of corporate political activities on firms, information about such activities remains opaque, with some firms disclosing expansively and others parsimoniously. Recent debates on whether political activities should be made more transparent have attracted a great deal of attention from businesses, policy makers, investment professionals, and academics (Chartered Financial Analyst [CFA] 2014; Stein and Maxwell 2016).1 Some recent empirical studies have examined the impact of political transparency on shareholders (e.g., Werner 2017; Prabhat and Primo 2019), but there are no studies examining the impact of political transparency on creditors. Unlike shareholders, who are residual claimants, creditors are fixed claimants on firm value (Merton 197
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