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Government contracts and US bond yield spreads: A study on costs and benefits of materialized political connections
Author(s) -
Ngo Thanh,
Susnjara Jurica
Publication year - 2020
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/jbfa.12440
Subject(s) - bailout , yield (engineering) , corporate governance , government (linguistics) , endogeneity , business , bond , debt , revenue , sample (material) , monetary economics , politics , finance , economics , financial system , financial crisis , macroeconomics , linguistics , philosophy , materials science , chemistry , chromatography , political science , metallurgy , law , econometrics
In a 1991–2013 sample of bonds issued by US public firms, we find that the cost of debt (yield spread relative to comparable Treasuries) of suppliers to government agencies is contingent on the strategic importance of the supplier's industry. The yield spreads for strategically unimportant government suppliers are higher than for firms that are not government suppliers. If government contracts serve as tangible evidence of political connections, these higher yield spreads indicate that weaker corporate governance as a cost of political connections outweighs the benefits of said connections. For the subsample of government suppliers from strategically important industries, where the benefits of implicit bailout guarantees and revenue stability outweigh the corporate governance problems, the cost of debt is lower than for firms that are not government suppliers. The higher (lower) cost of debt for strategically unimportant (strategically important) suppliers is confined to contracting with the federal government. Our findings are robust to alternative variable and sample specifications, and to endogeneity concerns.