The Real Effects of Government-Owned Banks: Evidence from an Emerging Market

Abstract:     
Government ownership of banks is widespread around the world. Using plant-level data for Brazilian manufacturing firms, this paper provides evidence that government control over banks leads to significant political influence over the real decisions of firms. I find that firms eligible for government bank lending expand employment in politically attractive regions near elections. These expansions are associated with additional (favorable) borrowing from government banks. Also, the expansions are persistent, take place just before elections, only before competitive elections, and are associated with lower future employment growth by firms in other regions. The analysis suggests that politicians in Brazil use bank lending to shift employment towards politically attractive regions and away from unattractive regions.
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Number of Pages in PDF File: 53

Keywords: Government Ownership, Bank Lending, Political Economy, Financial Regulation, Firm Employment

JEL Classification: G21, G28, G31

Accepted Paper Series