Political connections and preferential access to finance: The role of campaign contributions

Political connections and preferential access to finance: The role of campaign contributions 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 did not around the 1998 and 2002 elections. This suggests that 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 gross domestic product per annum. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Financial Economics Elsevier

Political connections and preferential access to finance: The role of campaign contributions

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Publisher
Elsevier
Copyright
Copyright © 2007 Elsevier Ltd
ISSN
0304-405x
D.O.I.
10.1016/j.jfineco.2006.11.003
Publisher site
See Article on Publisher Site

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 did not around the 1998 and 2002 elections. This suggests that 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 gross domestic product per annum.

Journal

Journal of Financial EconomicsElsevier

Published: Jun 1, 2008

References

  • Pareto-improving finance policy
    Coate, S.
  • Estimating the value of political connections
    Fisman, R.
  • Electoral competition and special interest politics
    Grossman, G.; Helpman, E.
  • Cronyism and capital controls: evidence from Malaysia
    Johnson, S.; Mitton, T.
  • Corporate governance, economic entrenchment, and growth
    Morck, R.; Wolfenzon, D.; Yeung, B.

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