The Impact of Firm-Level Political Risk on Creditor Control

Abstract

This article examines the impact of firm-level political risk on the value of creditor control, which is measured as the premium difference in the bond price and an equivalent synthetic bond without control rights. The synthetic bond is constructed from the credit default swap contract. We find empirically that the value of creditor control increases as the firm-level political risk increases, especially among firms with investment-grade ratings, large size, low leverage, or low equity volatility. This effect appears to be more pronounced among firms experiencing financial constraints or industry shocks. During periods of great partisan conflicts, the impact of firm-level political risk on the value of creditor control decreases.

TOPICS: Fixed income and structured finance, credit default swaps, credit risk management, information providers/credit ratings