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Partisan Conflict and Corporate Credit Spreads

I document a positive relationship between partisan conﬂict and corporate credit spreads. A one standard deviation increase in partisan conﬂict is associated with a 1.97 basis point increase in the next one-month corporate credit spreads after controlling for bond-issue information, ﬁrm characteristics, macroeconomic variables, uncertainty measures, and sentiment measures. The result holds when using instrumental variable to resolve endogeneity concerns. I further ﬁnd that partisan conﬂict has a greater impact on corporate credit spreads for ﬁrms with higher exposure to government policies, including government spending policy, tax policy, trade policy and regulation policy. Firms that are actively involved in political activities are also more sensitive to changes in political polarization. Intensiﬁed partisan conﬂict affects excess bond premium and inﬂuences credit spreads primarily via discount rates.