A Theory of Political Connections Through Lender Compensation, Enforcement, and Social Objectives on Interest Rates, Access to Credit, and Investment

44 Pages Posted: 15 May 2016 Last revised: 14 Jan 2017

Date Written: December 1, 2016

Abstract

I model the effect of political connections through the channels of lender compensation contract enforcement, and social objectives on financial outcomes such as interest rates, default rates, financial constraints, investment decisions, and the manager’s decision about whether to be politically connected or unconnected. The model shows that the effect of political connections on financial outcomes depends upon the relative importance of each channel. By demonstrating the influence of each channel, the model helps explain many contradictory empirical findings about the relationship between political connections and financial outcomes.

Keywords: political connections, lending decisions, social objectives

JEL Classification: G21, G32, D72

Suggested Citation

O'Connor Keefe, Michael, A Theory of Political Connections Through Lender Compensation, Enforcement, and Social Objectives on Interest Rates, Access to Credit, and Investment (December 1, 2016). 8th Conference on Financial Markets and Corporate Governance (FMCG) 2017. Available at SSRN: https://ssrn.com/abstract=2779861 or http://dx.doi.org/10.2139/ssrn.2779861

Michael O'Connor Keefe (Contact Author)

Victoria University of Wellington ( email )

P.O. Box 600
Wellington, 6140
New Zealand

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