The impact of terrorism and institutional quality on cost of debt: an analysis on developing countries

Abstract

This study examines the impact of terrorism and institutional quality on the cost of debt. Considering all observed incidents in 35 countries over the period 1998-2019. Our main finding is that terrorist activity has a positive and significant effect on the cost of debt. We also find that improved institutional quality help to reduce the cost of debt. Our analysis also suggests that the response of the cost of debt to shocks on terrorism and quality institutions lasts between one and eight years. However, there is evidence of a bidirectional Granger causality between the cost of debt and the global terrorism index and between institutional quality and the cost of debt in the case of the global terrorism index. The policy implications of the empirical findings have been discussed.