Research by Javier Mella, a member of the Faculty of Engineering and Applied Sciences, recently won a Fondecyt Iniciación.
The researcher of the School of Engineering and Applied Sciences Javier Mella recently won a Fondecyt Initiation for your research Political Cycles and the Cross-Section of Corporate Bond Returns: Government Spending, Corporate Taxes, and Climate Changewhere he analyzes the impact of political cycles on corporate bond yields.
"We want to examine how policy decisions, such as corporate taxes, government spending and climate change-related policies, affect the performance of corporate bonds, one of the main sources of financing for companies. This analysis is set in a context in which political cycles play a crucial role in government decision-making and its impact on financial markets," explains Mella, who is working on this study along with working with Muhammad Kabir of the University of Manitoba (Canada).
This project has several implications for both markets and companies. "First, the study allows us to understand how financial markets incorporate information related to the implementation of public policies and electoral cycles. It also seeks to understand how these changes may affect firms' sources of financing, especially in an environment of growing concern about climate change. In addition, the results could lead to the creation of investment strategies in fixed income assets or to the proposal of restrictions on the transactions of politicians involved in the definition of public policies", explains the academic.
Based on previous studies on other types of assets y preliminary results of the projectJavier Mella comments that bonds are expected to perform better in periods of lower corporate taxes, which translates into higher cash flows available for debt repayment. And also, higher government spending, especially in industries that rely more heavily on this support, could reduce bond yields in these areas.
"The research also highlights the impact of environmental policies on firms that are more vulnerable to climate change, especially small firms, which may face higher costs due to the transition to a green economy. Moreover, these effects are anticipated to be more relevant in low credit quality firms, which are more susceptible to political and environmental fluctuations."
The study may also impact economic policy formulationAccording to Mella, this analysis can be used to evaluate the efficiency with which markets incorporate changes and improve the efficiency of the bond market. "And also these results could serve as a basis for the formulation of restrictions on transactions in financial instruments by politiciansespecially those involved in making decisions on taxation, spending and climate change," he adds.
Another area where this research may have an influence is in the policies that promote greater corporate commitment to environmental and social sustainability. "We could see how companies' commitment to sustainable practices positively impacts their returns, which is reflected in asset prices, and how investors understand this relationship and adjust their expectations to environmental and social realities, which could help companies align their strategies with a more sustainable and profitable approach over the long term," concludes Mella