Associate Professor Zhenxing Wu, a researcher of the Base, has published a collaborative paper titled "Firm-level political risk and debt choice" in Journal of Corporate Finance

Abstract: We examine the effect of firm-level political risk on debt choices and find: (i) firms with higher political risk display a preference for private debt over public debt; (ii) the magnitude of this preference varies with the aggregate policy uncertainty; (iii) politically risky firms indeed receive less favorable terms in the bond market. To explain such findings, we show that private lenders have several advantages in serving politically risky borrowers. First, to the extent that lenders cannot perfectly foresee the adoption of new government policies, private lenders' expertise in implementing the reorganization process is important to limit their potential loss. Second, politically risky borrowers must undertake significant operation adjustments facing rising policy uncertainty. Private lenders can gather accurate information and closely monitor these adjustments. Last, as the severity of political risk varies with aggregate policy uncertainty, there exists an implicit contract between a borrower and its relationship bank, whereby a borrower accepts less favorable terms during normal times in exchange for the bank's support during difficult times. Taken together, this study advances our understanding of how cross-sectionally heterogeneous political risk influences corporate debt choice.

Keywords: Political risk, Debt choice, Bank loan, Relationship banking

link：Firm-level political risk and debt choice - ScienceDirect

Teacher profile

Zhenxing Wu, Associate Professor of annual salary, School of Finance, Zhongnan University of Economics and Law, Researcher of Digital Technology and Modern Finance Innovation and Intellectual Introduction Base. Research areas include the application of market microstructure theory to international finance, asset pricing and corporate finance. The research results have been published in the Journal of International Money & Finance, Journal of Corporate Finance and other international journals.