The High Cost of Politics for Businesses

By Dr. Liyao WANG

The High Cost of Politics for Businesses The High Cost of Politics for Businesses

As the U.S.’s election looms, the escalating partisanship is a constant reminder of how political divisions can disrupt decision-making. Since the Obama era, polarised factions and gridlocked government have increasingly hampered the functioning of key American institutions. This political strife has spilled over into the private sector, particularly affecting companies and industries vulnerable to shifts in government policy. A new paper[1] explores how partisan conflict affects the credit spreads of firms and industries whose prospects are closely tied to governmental fluctuations.

From fracking and immigration to free trade and defence, political conflicts are escalating across various sectors. As traditional consensus fades, the fortunes of many firms increasingly hinge on the ebb and flow of political dynamics. For instance, the oil industry often back candidates opposed to those preferred by renewable energy companies. Combining a partisan conflict index—derived from US news, political donations by executives and firms as well as government spending patterns—with data on corporate bonds and financial returns, volatility, economic expectations and various economic and political uncertainty metrics, the research uses corporate credit spreads (the difference in yield between corporate bonds and Treasury notes of similar maturity) to evaluate how political developments impact the cost of doing business for politically exposed firms.

It turns out that political involvement has real financial consequences. Analysis of high political donations during periods of heightened conflict—such as the threat of a government shutdown in 2013 and Trump’s 2016 victory—reveals that politically-connected firms in certain sectors had to pay nearly 1% more on their debt to compensate for the perceived risk of their political exposure with a bond premium excess—the component of credit spreads not driven by the risk of default—of up to 8%. These firms often experienced a short-term deterioration in credit ratings. This widening of credit spreads (more pronounced for speculative-grade bonds) doesn’t necessarily signal a higher risk of bankruptcy but reflects the premium investors demand for holding politically risky debt. The good news is that this effect is short-lived, fading within three months as political tensions ease.

Still, it’s clear that political conflict does make investors more risk-averse, thereby reducing decision-making efficiency, destabilising business conditions and increasing economic uncertainty. In addition to widening credit spreads, this environment can lead to a contraction in credit supply, particularly for politically sensitive companies. Companies facing political conflict also tend to avoid debt financing, opting instead to issue equity—a move that can force them to delay investments as they struggle to secure capital.

As the November election nears, executives and firms are being courted by both Donald TRUMP and Kamala HARRIS. With investors closely tracking the political landscape, companies might want to think twice about the consequences of public endorsements. After all, as basketball icon Michael JORDAN famously remarked when justifying his apolitical stance: “Republicans buy sneakers, too.”

Reference:

[1] Wang, L. (2024). Partisan conflict and corporate credit spreads: The role of political connection. Journal of Corporate Finance, 84, 102526.