Lending Relationships and Corporate Political Ideology

1 Pages Posted: 18 Jan 2023

See all articles by Sibo Liu

Sibo Liu

Hong Kong Baptist University

Liyao Wang

Hong Kong Baptist University

Mark Yuzhi Yan

Hong Kong Baptist University

Date Written: January 16, 2023

Abstract

We examine the political implications of bank-firm lending relationships. We use the data on the political contributions of banks and firms to identify their partisanships, namely, political ideology. In a difference-in-differences design, we find the political ideology of a borrowing firm converges with that of the lending bank following the inception of a lending relationship. The results are robust to an identification strategy based on bank mergers that exogenously alter a bank’s ideology. The convergence effect is stronger during the period with greater political conflicts, among borrowers with greater credit risks, and among bank-dependent borrowers. As a mechanism, we document political ideology shapes the formation of lending relationships while having little effect on loan pricing. In additional analyses, we examine the extended implications for shareholders and other stakeholders. Firms in lending relationships with politically conflicted banks experience negative equity returns around the salient event of Trump’s election victory in 2016, which marks a special period of intensified political conflicts. The effect of the lender’s ideology also passes onto the borrower’s employees, therefore spreading out to a larger group of voters.

Keywords: Banks, Lending relationships, Political ideology

JEL Classification: G21, G28, G38

Suggested Citation

Liu, Sibo and Wang, Liyao and Yan, Mark Yuzhi, Lending Relationships and Corporate Political Ideology (January 16, 2023). Available at SSRN: https://ssrn.com/abstract=4325258 or http://dx.doi.org/10.2139/ssrn.4325258

Sibo Liu

Hong Kong Baptist University ( email )

Renfrew Road 34
Kowloon Tong
Hong Kong

Liyao Wang (Contact Author)

Hong Kong Baptist University ( email )

Hong Kong

Mark Yuzhi Yan

Hong Kong Baptist University ( email )

Hong Kong

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