Working Paper: CEPR ID: DP6045
Authors: Stijn Claessens; Erik Feijen; Luc Laeven
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; preferential lending; rent seeking
JEL Codes: D7; G1; G2; G3; P48
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Campaign contributions (D72) | higher stock returns (G17) |
| Campaign contributions (D72) | increased bank financing (G21) |
| Contributions to winning candidates (D79) | greater impact on firm value (G32) |
| Contributions to incumbents (D79) | greater benefits (H43) |
| Political connections (D72) | implications for firm value and access to finance (G32) |
| Campaign contributions (D72) | capital misallocation (E22) |
| Campaign contributions (D72) | rent-seeking behavior (D72) |