Lending Relationships and Corporate Political Ideology

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