Political uncertainty and bank loan contracting

Given that political uncertainty greatly impacts firm level investment decisions, this paper examines whether and how political uncertainty influences a firm's cost of bank loans. We create a novel measurement of individual firm's exposure to political uncertainty and find that fluctuations in the political environment impose additional costs on the loan contract. Economically, a one standard deviation increase in a firm's idiosyncratic political exposure is related to 11.90 basis points of additional spreads. In addition, related lenders have an information advantage in pricing a borrower's future political exposure, while non-related lenders do not have such an advantage. On the supply side, lenders with higher political exposure also request additional loan spreads. (C) 2014 Elsevier B.V. All rights reserved.