Political Connections and Preferential Access to Finance: The Role of Campaign Contributions

61 Pages Posted: 21 Mar 2007  

Stijn Claessens

Bank for International Settlements; University of Amsterdam - Finance Group; Centre for Economic Policy Research (CEPR); Tinbergen Institute; European Corporate Governance Institute (ECGI)

Erik Feyen

World Bank - Finance & Markets Global Practice; Ahead Analytics Inc

Luc Laeven

European Central Bank (ECB); Centre for Economic Policy Research (CEPR)

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Abstract

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.

Keywords: Campaign Contributions, Elections, Corruption, Preferential Lending

JEL Classification: D7, G1, G2, G3, P48

Suggested Citation

Claessens, Stijn and Feyen, Erik and Laeven, Luc, Political Connections and Preferential Access to Finance: The Role of Campaign Contributions. Journal of Financial Economics, Vol. 88, No. 3; AFA 2008 New Orleans Meetings Paper; ECGI - Finance Working Paper No. 166/2007. Available at SSRN: https://ssrn.com/abstract=945196

Stijn Claessens (Contact Author)

Bank for International Settlements ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

University of Amsterdam - Finance Group ( email )

Roetersstraat 18
Amsterdam, 1018 WB
Netherlands
+31 20 525 6020 (Phone)
+31 20 525 5285 (Fax)

HOME PAGE: http://www.fee.uva.nl/fm/index.htm

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Tinbergen Institute

Burg. Oudlaan 50
Rotterdam, 3062 PA
Netherlands

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

Erik H. B. Feyen

World Bank - Finance & Markets Global Practice ( email )

1818 H Street, N.W.
Washington, DC 20433
United States
+1 (202) 458 2038 (Phone)
+1 (202) 522 3184 (Fax)

Ahead Analytics Inc ( email )

Washington, DC
United States

HOME PAGE: http://www.aheadanalytics.com

Luc A. Laeven

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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