Geopolitical Risk and the Cost of Corporate Financing

Geopolitical risk (GPR) has become an increasingly important source of uncertainty in global financial markets and corporate decision-making. While a growing literature documents its economic and financial consequences, relatively little is known about how geopolitical risk affects corporate financing and why its effects differ across firms and industries. This thesis investigates the role of geopolitical risk in shaping the cost and allocation of corporate financing and explores the channels through which geopolitical shocks affect financing outcomes. The thesis begins by examining the impact of geopolitical risk on corporate credit risk. Using a U.S. corporate bonds sample, the analysis shows that heightened geopolitical risk is associated with significantly wider credit spreads, indicating that investors demand greater compensation for bearing credit risk during periods of geopolitical uncertainty. The effects vary across firms and industries, suggesting that the effects depend on firms’ underlying exposure and vulnerability to geopolitical shocks. Motivated by this heterogeneity, the thesis next develops a firm-level measure of geopolitical risk perception based on earnings call transcripts. The proposed framework captures the extent to which managers discuss geopolitical issues in risk-related contexts. The evidence shows that firms operating in industries with greater geopolitical exposure and supply-chain vulnerabilities are more likely to discuss geopolitical risk and do so more intensively. Firms also frame geopolitical events through different economic channels, highlighting the importance of firm-level perspectives in understanding the transmission of geopolitical shocks. Finally, the thesis examines whether banks incorporate geopolitical risk perceptions into lending decisions. Using a bank-specific geopolitical risk measure, the analysis shows that banks charge higher loan spreads when they perceive greater geopolitical risk. The effect is stronger for borrowers with greater exposure to global supply chains and international markets. Additional evidence indicates that banks reallocate lending away from industries that are more vulnerable to geopolitical disruptions.