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

61 Pages Posted: 8 Dec 2006

See all articles by Stijn Claessens

Stijn Claessens

Bank for International Settlements (BIS)

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 than firms that don't around the 1998 and 2002 elections. This suggests contributions help shape policy on a firm-specific 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 financing 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 this rent seeking over the two election cycles to be at least 0.2% of GDP per annum.

Keywords: Campaign Contributions, Elections, Rent-seeking, Preferential Lending

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

Suggested Citation

Claessens, Stijn and Feyen, Erik H. B. and Laeven, Luc A., Political Connections and Preferential Access to Finance: The Role of Campaign Contributions. ECGI - Finance Working Paper No. 143/2007; Journal of Financial Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=950263

Stijn Claessens

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

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 (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

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