Search

Firm political contributions are associated with lower credit default swap spreads for contributing firms. To address endogeneity, we employ novel instruments and use a set of exogenous events on campaign contribution restrictions: (a) the passage of the Bipartisan Campaign Reform Act (BCRA) that banned soft money contributions, (b) the Federal Election Commission decision to interpret the BCRA less strictly, (c) the partial reversal of the BCRA and, (d) the McConnell v. FEC Supreme Court decision, which upheld the BCRA. Overall, the evidence suggests that political contributions are valued by credit market participants.

This paper examines how accounting quality affects the degree of debt concentration in corporate capital structures (i.e., a firm’s tendency to predominantly rely on only a few types of debt). Motivated by theoretical and empirical research that supports a strong link between creditors’ coordination costs and debt concentration and the importance of accounting quality in reducing these coordination costs, we hypothesize that firms with low accounting quality have a more concentrated debt structure. Measuring financial reporting quality by the disclosure of material internal control weaknesses over financial reporting (ICWs), we find that ICWs lead to a significantly more concentrated debt structure. We also show that the effect of ICWs on the degree of debt concentration is stronger for more severe ICW disclosures and for firms with a higher credit risk, further reinforcing the importance of financial reporting quality in determining debt concentration.