Political Connections and Preferential Access to Finance: The Role of Campaign Contributions
Board of Governors of the Federal Reserve System (FRB); University of Amsterdam - Finance Group; Centre for Economic Policy Research (CEPR); Tinbergen Institute; European Corporate Governance Institute (ECGI)
World Bank - Finance & Markets Global Practice; Ahead Analytics Inc
European Central Bank (ECB); Centre for Economic Policy Research (CEPR); International Monetary Fund (IMF)
Journal of Financial Economics, Forthcoming
ECGI - Finance Working Paper No. 166/2007
AFA 2008 New Orleans Meetings Paper
Using novel indicators of political connections constructed from campaign contribution data, we show that Brazilian firms that provided contributions to (elected) federal deputies experienced higher stock returns around the 1998 and 2002 elections. This suggests contributions help shape policy on a firm-specific rather than ideological basis. Using a firm fixed effects framework to mitigate the risk that unobserved firm characteristics distort the results, we find that contributing firms substantially increased their bank leverage relative to a control group after each election, indicating that access to bank finance is an important channel through which political connections operate. We estimate the economic costs of these political connections over the two election cycles to be at least 0.2% of GDP per annum.
Number of Pages in PDF File: 61
Keywords: Campaign Contributions, Elections, Corruption, Preferential Lending
JEL Classification: D7, G1, G2, G3, P48
Date posted: March 21, 2007
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