Political Polarization and Corporate Credit Ratings

ABSTRACT This study examines the effect of political polarization on corporate credit ratings. Political polarization is defined as the ideological difference between the Democratic and Republican members of the state legislatures and measures the likelihood of bipartisan compromises. States with more polarization will have an increased likelihood of impasses, which will negatively affect economic development and increase uncertainty. We examine if corporations headquartered in these states are perceived to have higher credit risk. This study finds that a one‐standard‐deviation increase in political polarization is linked to a 0.237 notch decrease in credit ratings. We find that that the negative effect on credit ratings is stronger for corporations that rely more on the governments for sales and for corporations located in areas with divided government. Lastly, we find that for corporations that relocate to an area with lower polarization, the effect of polarization on credit ratings is attenuated.