Observational study reveals higher loan spreads alongside fewer covenants when borrowers and lenders share political affiliations, suggesting a preference for contractual flexibility over cost.
This study investigates political homophily between the top executives of borrowers and lenders. We observe a high level of political homophily between borrowers' and lenders' management teams, with a one‐standard‐deviation increase in homophily associated with an increase in spreads of approximately 126 basis points. However, greater political homophily is associated with less covenant intensity and fewer collateral requirements. These associations are stronger among borrowers with high information asymmetry and weaker governance. These findings are consistent with political homophily reflecting relational contracting and borrowers' preferences for contractual flexibility.
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Alshamrani et al. (2026) studied this question.
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