Policy uncertainty and corporate bond issuance costs

This paper investigates the effect of policy uncertainty on offering yield spreads using a comprehensive corporate bond issuing dataset. Empirical evidence shows a significant positive impact of policy uncertainty on offering yield spreads of bonds. This effect is more substantial for firms with higher exposure to tax policy, greater dependence on external finance, a less transparent information environment, and a weaker economy. Bond covenants moderate the uncertainty effect as covenants provide a trigger for renegotiation. Further analysis shows that the policy uncertainty premium in the bond market drives the negative impact of policy uncertainty on corporate investments.