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

We show that political investments, defined as political contributions and lobbying expenditure, have a large impact on the firm’s credit risk. Firms that invest in politics, on average, have significantly and economically lower CDS spreads. We address endogeneity issues by utilizing a quasi-natural experiment and an instrumental variable approach to obtain exogenous variations in political investments, and find that political investments reduce the price of credit risk. The reduction in spreads is greater for firms that are more sensitive to government policies. In addition, and consistent with agency conflicts, political investments by weakly governed firms are relatively less effective at reducing the market price of credit risk.