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

Shunlan Fang (1) , Paul Hanouna (2) , Alexei Ovtchinnikov (3) , Saumya Prabhat (4)

1 Kent State University
2 Villanova University [USA]
3 HEC Paris - Ecole des Hautes Etudes Commerciales
4 Indian School of Business

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.

Keywords: Political Contributions; Credit Risk; CDS; Moral Hazard; Financial Crisis

Domains: Business administration

Shunlan Fang, Paul Hanouna, Alexei Ovtchinnikov, Saumya Prabhat. Political Contributions and the Price of Credit Risk: Evidence from Credit Default Swaps. 2017. ⟨hal-01941524⟩