Banks, Political Capital, and Growth

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Abstract

We show that politically connected banks influence economic activity. We exploit shocks to individual banks’ political capital following close U.S. congressional elections. We find that regional output growth increases when banks active in the region experience an average positive shock to their political capital. The effect is economically large, but temporary, and is due to lower restructuring in the economy, not increased productivity. We show that eased lending conditions (especially for riskier firms) can account for the growth effect. Our analysis is a first attempt to directly link the politics and finance literature with the finance and growth literature.

Original languageEnglish
Pages (from-to)613-655
Number of pages43
JournalReview of Corporate Finance Studies
Volume12
Issue number3
DOIs
Publication statusPublished - 2022

Bibliographical note

Funding Information:
We thank participants at various conferences and seminars for comments and suggestions. We are also indebted to Pat Akey, Sylvain Benoit, Isil Erel (the editor), Thomas Kraus, Thomas Matthys, Magdalena Rola-Janicka, Vahid Saadi, Orkun Saka, and an anonymous referee for their valuable insights. Roham Rezaei and Tony Nguyen provided excellent research assistance. This work was supported by the Dutch Research Council [VI.Veni.191E.055 to TL]. The reproducibility of all results in this paper is certified by a certification agency (see of the for information about the reproducibility certificate). All remaining errors are our responsibility.

Publisher Copyright:
© The Author(s), 2023.

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