Political sentiment and credit ratings

Abstract

This study examines the relationship between firms’ political sentiment (PSENT) and their credit ratings. Using US public firms as the sample, we reveal that PSENT is positively associated with corporate credit ratings. Furthermore, we find evidence indicating that a positive PSENT leads to higher credit ratings, while a negative PSENT results in lower credit ratings. We also demonstrate that PSENT is positively (negatively) associated with the investment grade and rating upgrade (rating downgrade). The cross-sectional analysis indicates that the positive relationship between PSENT and credit ratings is more evident among firms facing severe information asymmetry, financial distress risk, and weaker governance. Additionally, we observe that PSENT leads to higher new debt issuance. Finally, we conduct a survey of credit analysts and find evidence that corroborates our findings from empirical analyses. Overall, our study suggests that PSENT has an essential bearing on corporate credit quality.