Reaching for Influence: Do Banks Use Loans to Establish Political Connections?

50 Pages Posted: 22 Jun 2021 Last revised: 23 Jun 2021

See all articles by Mahsa Kaviani

Mahsa Kaviani

University of Delaware

Hosein Maleki

Florida State University - College of Business

Pavel G. Savor

DePaul University - Kellstadt Graduate School of Business

Date Written: May 1, 2021

Abstract

We explore whether banks use loans as a tool for political influence. Using close elections as our setting, we show that firms linked to members of Congress receive lower interest rates on new loans, which are also larger and have fewer covenants. Such firms, however, do not experience improvements in future performance or reductions in default risk. The impact of political connections is greater for important politicians, for firms that are large contributors, and when both are from the same state. Consistent with banks seeking influence through preferential lending to politically connected firms, the effect is also stronger for banks with regulatory problems, during the TARP period, and for banks with a history of bailouts. Furthermore, such banks lend more frequently to connected firms.

Keywords: bank loans; elections; political connections; influence-seeking

JEL Classification: G21, G32, D72

Suggested Citation

Kaviani, Mahsa and Maleki, Hosein and Savor, Pavel G., Reaching for Influence: Do Banks Use Loans to Establish Political Connections? (May 1, 2021). Available at SSRN: https://ssrn.com/abstract=3867488 or http://dx.doi.org/10.2139/ssrn.3867488

Mahsa Kaviani

University of Delaware ( email )

20 Orchard Rd, Newark, DE
Newark, DE 19716
United States

Hosein Maleki (Contact Author)

Florida State University - College of Business ( email )

423 Rovetta Business Building
Tallahassee, FL 32306-1110
United States

Pavel G. Savor

DePaul University - Kellstadt Graduate School of Business ( email )

1 E. Jackson Blvd.
Chicago, IL
United States

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