Abstract
•Politically connected U.S. firms had a significantly higher debt ratio than unconnected firms during the 2009 to 2015 period.•This higher debt ratio does not depend on the amount of contribution made to the political parties during the election campaigns.•Politically connected U.S. firms experienced a significantly lower cost of debt than unconnected firms did during the 2009 to 2015 period.•Political connection gave U.S. firms an advantage that offsets the negative effect of high leverage on their cost of debt.
In this paper, we analyze the effect of political connections on the level and cost of debt of U.S. firms. We identify politically connected firms through manually collecting data on their financial contributions to the two major U.S. political parties, the Democratic Party and the Republican Party, during the 2008 and 2012 U.S. election campaigns. Our main results indicate that during the 2009 to 2015 period, politically connected firms had a significantly higher debt ratio and experienced a lower cost of debt than did unconnected firms. Additional tests show that these results are robust to different model specifications and suggest that politically connected firms benefit from a higher indebtedness level than do unconnected firms and that their political connections give them an advantage that offsets the negative effect of high leverage on their cost of debt.