Two Essays on Politics in Corporate Finance

• Main Author: Yuan, Xiaojing
• Format: Others
• Published: Scholar Commons 2013
• Subjects: Corporate Political Strategies; Cost of Debt; Local Bias; Political Networks; Political Uncertainties; Finance and Financial Management
• Online Access: http://scholarcommons.usf.edu/etd/4796; http://scholarcommons.usf.edu/cgi/viewcontent.cgi?article=5993&context=etd

I examine how political geography affects firms' cost of debt. Policy risk, measured by proximity to political power reflected in firms' position in the country's political map, is negatively related to corporate bond ratings and positively related to firms' cost of debt. I find firms' policy risk can be mitigated by engaging in corporate political strategies like making campaign contributions or lobbying. Consistent with the view that such political strategies effectively protect firms against uncertainty about future policies, I find policy risk has less of an impact on the cost of debt of firms that support more powerful and well-connected politicians in the legislative co-sponsorship network or that spend more money on lobbying. Using a sample of state pension funds' equity holdings, I find that state pension funds exhibit not only local bias but also bias towards politically connected stocks. These politically connected local firms held by state pension funds do not exhibit better performance compared with their local benchmarks not held by these funds before the holding period, and the overweighting of politically connected local firms is negatively related to pension fund returns. My results do not support the information advantage hypothesis that state pension funds exhibit overweighting of local firms because they have an information advantage about home-state firms. I further examine the factors that explain local bias from political perspectives. My results show that local bias is related to public policy integrity and local politicians' congressional connections.