Partisan Conflict and Corporate Credit Spreads

We document a positive relationship between partisan conflict and corporate credit spreads. A one standard deviation increase in partisan conflict is associated with a 0.91% increase in the next one-month corporate credit spreads after controlling for bond-issue information, firm characteristics, macroeconomic variables, uncertainty measures, and sentiment measures. The result holds when using instrumental variable to resolve endogeneity concerns. We further find that partisan conflict has a greater impact on corporate credit spreads for firms with higher exposure to government policies, including government spending policy and tax policy, and for firms with higher dependence on external finance. Firms that are actively involved in political activities are also more sensitive to changes in political polarization.