The impact of state-level economic policy uncertainty on loan pricing

Using a sample of 32,710 loan facilities to 3854 firms in 50 US states from 1990 to 2021, this paper presents the first empirical analysis of the impact of state-level policy uncertainty on loan pricing and non-price loan terms. We find that increased state-level policy uncertainty, driven by local, state, national, and international factors, leads to higher loan prices. These results hold when we use gubernatorial elections as an alternative measure of state-level policy uncertainty. Further analysis shows that heightened uncertainty raises firm default risk, prompting banks to charge higher loan rates to compensate for the bearing higher downside risk. Riskier firms, characterized by high leverage, low tangibility, liquidity, and Z-scores, face higher state-level policy uncertainty premiums on loans. Heightened state-level policy uncertainty also results in more tightened lending standards.