We investigate the impact of political homophily between CEOs and independent directors on the implied cost of equity capital. Using a novel hand-collected dataset on the political donations of U.S. executives and directors, we find that political alignment between CEOs and independent directors is positively associated with the cost of equity capital. This relationship remains robust across a range of endogeneity tests and alternative measures of both political homophily and the cost of equity capital. Our channel analysis reveals that firms with greater political homophily tend to have weaker credit ratings, higher default risk and greater internal control weaknesses, which in turn contribute to a higher implied cost of equity capital. Finally, cross-sectional tests reveal that the effect is stronger in firms led by overconfident CEOs, in prospector firms and in firms with weaker information environments. Overall, our results imply that political homophily has governance and market implications that warrant attention from investors, managers, and policymakers.