Policy risk, corporate political strategies, and the cost of debt

- We examine how political geography and political strategies affect firms' cost of debt.
- Policy risk at the state level is positively related to firms' cost of debt.
- Political strategies help firms hedge against the impact of local policy risk.
- Yield spread is lower for well-connected firms through PAC contribution or lobbying.

We examine how political geography affects firms' cost of debt. Local policy risk, measured by proximity to political power reflected in firms' position in the country's political map, is positively related to firms' cost of debt. Employing a difference-in-difference-in-differences (DDD) estimation around presidential elections, we find that firms headquartered in states that become more aligned with the president after elections are exposed to more policy risk and thus incur higher yield spreads. Firms can manage policy risk by engaging in corporate political strategies. Consistent with the view that such political strategies protect firms against uncertainty about future policies, we find policy risk has less of an impact on a firm's cost of debt when the firm makes more PAC contributions or spends more money on lobbying.