Abstract
Purpose
This paper aims to examine how a firm's political party orientation (Republican or Democratic), which is measured as the composite index based on the political party leanings of top managers, affects bank loan contracts. This study also investigates how the political culture of local states has a significant impact on loan contracts.
Design/methodology/approach
This research uses various databases including the Loan Pricing Corporation's DealScan database, financial covenant violation indicators based on the Securities and Exchange Commission (SEC) filings, firm bankruptcy filings and political culture index data to examine the impact of political orientation on the cost of debt. This paper also includes the state level of gun ownership and bachelor's degrees to investigate how local political culture affects the loan contract. To control endogenous concerns, this paper uses an instrumental variable analysis.
Findings
Firms that have Republican-oriented political identities pay lower yield spreads for the main costs of debt including all-in-spread-drawn and all-in-spread-undrawn. This pattern is consistent with other fees of bank loans. This paper finds that an increase in conservative political policies toward Republican orientations is negatively associated with the cost of debt. The main findings also show that the political culture in the state where the headquarters of the borrowing firm are located plays an important role in bank loan contracts.
Originality/value
The findings in this paper provide evidence that a firm's political party orientation significantly affects the loan contract terms in both pricing and non-pricing terms. To the best of the author's knowledge, this is the first study that shows the importance of political party identification on loan contracts by separating the sample into Republican, neutral and Democratic.