Do Political Connections Matter to Bondholders? Evidence from Corporate Bond Offerings

Abstract

The author examines the relationship between corporate political connections and yields of newly issued corporate bonds. Using the data from the SDC Global New Issue on 6,265 corporate bond issues for the period 2000–2014, the author finds that bonds offered by politically connected firms average a 36-basis-point yield discount over bonds offered by non-connected firms, holding other things constant. The author also finds that the negative relationship between political connections and bond yield becomes more pronounced when the offering is rated non-investment grade, when the issuer is largely dependent on government spending, and when it faces a more opaque information environment. Overall, the results suggest that corporate ties to politicians add firm value and are viewed favorably in the bond market.

TOPICS: Fixed income and structured finance, legal/regulatory/public policy

Key Findings

• • Bond investors require significantly lower yields on bonds offered by politically connected firms than those offered by non-connected firms.

• • The negative relationship between political connections and bond yield is at least partly driven by the credit quality of the issue, the issuer’s dependence on government spending, and the information environment.

• • The findings in this article suggest that corporate ties to politicians add firm value and are viewed favorably in the bond market.