Borrowers from the same state as the chairman of the US Senate Banking Committee ("connected borrowers") are able to borrow at spreads 19 bps lower than other borrowers. Banks that provide connected loans enjoy regulatory relief in the form of fewer future investigations. Connected borrowers' contributions toward the chairman are influenced by their cost of loans, but the same is not true for nonconnected borrowers. Findings suggest the chairman is incentivized by re-election to help connected borrowers obtain cheaper loans. Results are largely consistent with the existence of an indirect triangular quid pro quo relationship between firms, banks, and politicians.
Political connection Campaign contribution Bank loan Cost of borrowing
Yifan Zhou
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Fanhai International School of Finance, Fudan University, China
NETL
NSTL
Elsevier
