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

Abstract

Abstract:We provide empirical evidence that campaign contributions are strongly associated with market expectations of future firm-specific political favors, including preferential access to external finance. Using a novel dataset, we find that Brazilian firms providing more contributions in the 1998 campaign to (elected) federal deputies experienced higher stock returns following the election, even after controlling for industry-specific effects and firm-specific characteristics. This suggests that federal deputies were expected to shape policy and actions to benefit particular firms. Consistent with such political favors, we find that these firms substantially increased their financial leverage relative to a control group in the four years following election, especially from banks, suggesting that contributions gained firms preferential access to finance. JEL Classifications: D7, G1, G2, G3, and P48.

Do Political Connections Buffer Firms from or Bind Firms to the Government? A Study of Corporate Charitable Donations of Chinese Firms

“…As the recent review by Mellahi et al (2016) indicates, buffering is common around the world. For instance, Claessens et al (2008) argues that political connections shield Brazilian firms from government demands, and similar results are found in the study by Barth et al (2008) across 150 countries. On the other hand, binding effects has also been found in a wide range of contexts Thum 2009, Robinson andVerdier 2013).…”

Political capital and CEO entrenchment: Evidence from CEO turnover in Chinese non-SOEs

“…Empirical evidence supporting these predictions prevails both in the US and other countries (e.g., Agrawal and Knoeber 2001, Krozner and Stratmann 1998, Goldman, Rocholl, and So 2009, Cooper, Gulen, and Ovtchinnikov 2010, Fisman, 2001, Hellman, Jones and Kaufmann 2000, Johnson and Mitton 2002, Faccio 2006). For example, using an event study approach, Fisman (2001) and Faccio (2006) show that political connections are positively associated with firm value, which Faccio, Masulis, and McConnell (2006) and Claessens, Feijen, and Laeven (2008) suggest arises from preferred access to credit, regulatory favours, and government financial assistance. Few studies, however, explore the potential negative effect of political connections on corporate governance.…”

Political connections, bank deposits, and formal deposit insurance

“…On the one hand, some empirical studies find that the benefits of political connections are i) an easier access to financial resources such as bank loans or others funds at more convenient conditions (Charumilind et al, 2006;Claessens et al, 2008;Fraser et al, 2006;Khwaja and Mian, 2005;Li et al, 2008); ii) a build up confidence in the legal system (Li et al, 2008); iii) an improved performance (Johnson and Mitton, 2003); iv) a higher probability of being bailed out ; v) an increase in firm value by, for example, increasing its stock value (Goldman et al, 2009), and vi) a lower cost of equity capital (Boubakri et al, 2012). On the other hand, some studies find negative impacts of being politically connected firms such as i) lower quality of accounting information (e.g.…”

“…On the other hand, some studies find negative impacts of being politically connected firms such as i) lower quality of accounting information (e.g. reported earnings (Chaney et al, 2011)); ii) lower qualifications of the appointed managers and directors (Boubakri et al, 2012;Leuz and Oberholzer-Gee, 2006); iii) a decrease in long term performance because of lower managerial incentives and/or inefficiency (Claessens et al, 2008;Fan et al, 2007); and iv) a higher cost of debt (Bliss and Gul, 2012).…”