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Finance and Politics

Paper Session

Sunday, Jan. 6, 2019 10:15 AM - 12:15 PM

Hyatt Regency Atlanta, Hanover D & E
Hosted By: Association for Comparative Economic Studies
  • Chair: Gérard Roland, University of California-Berkeley

Anticorruption and Bank Lending

Cheng Sun
,
Peking University
Jiangmin Xu
,
Peking University
Yinuo Zhang
,
Princeton University

Abstract

We study how anti-corruption measures affect banks’ lending decisions to state-owned enterprises (SOEs) and non-state-owned enterprises (non-SOEs). We develop a model where an SOE and a non-SOE seek borrowings from a bank, where the bank obtain a positive private benefit due to corruption if it lends to the SOE. We use micro-level lending data from one of the largest banks in China and the Anti-corruption Campaign enacted by President Xi as a natural experiment to identify the causal effect of anti-corruption measures on bank lending to SOEs and non-SOEs. We find that SOEs received much more favorable borrowing terms than non-SOEs before the Anti-corruption Campaign, but this difference shrunk greatly since the Campaign was enacted, with non-SOEs receiving borrowing contracts with larger credit amounts, lower interest rates and longer durations.
JEL classification:

Do Banking Crises Improve Democracy

Beni Kouevi-Gath
,
Free University of Brussels
Pierre-Guillaume Méon
,
Free University of Brussels
Laurent Weil
,
University of Strasbourg

Abstract

We study the impact of banking crises on the level of democracy. We use an event-study method on a panel of up to 129 countries over the period 1975-2010 accounting for 94 systemic banking crises. We find that banking crises contribute to improving democracy. The bulk of the improvement takes place between 3 and 10 years after the end of a banking crisis. We explain this finding by the fact that banking crises create windows of opportunity to contest autocratic regimes.

Politics and Finance – How National Parliaments Affect Firms’ Cost of Capital

Robert Heigermoser
,
Yale University and Technical University of Munich
Marcel Maier
,
Technical University of Munich

Abstract

This study provides first empirical evidence on the link between economic policy concepts
in parliaments and capital markets’ risk perception. We identify inherent parliamentary
disagreement about economic policy as a common determinant of firms’ cost of
capital across developed democratic nations.
We use firm-level panel regressions to examine the long-term relationship between parliamentary
disagreement and firms’ cost of capital. For identification, we exploit exogenous
variation arising from surprising elections in a staggered difference-in-differences setting.
A higher level of disagreement in national parliaments leads to an increase in the cost
of capital for firms. Making use of firm-level heterogeneity in the sample, we provide
additional insights into the underlying mechanisms. The study shows that firms with a
higher share of international revenues are less affected by parliamentary disagreement.
The results are robust to a variety of alternative specifications and are in line with
theoretical predictions in the literature. This paper provides empirical evidence on economic
policy uncertainty originating from the central political institution – the national
parliament.

Lending Cycles and Real Outcomes: Costs of Political Misalignment

Cagatay Bircan
,
European Bank for Reconstruction and Development
Orkun Saka
,
London School of Economics

Abstract

We use data on the universe of credit in Turkey to document a strong political lending cycle. State-owned banks systematically adjust their lending around local elections compared with private banks in the same province. There is considerable tactical redistribution: state-owned banks increase credit in politically competitive provinces which have an incumbent mayor aligned with the ruling party, but reduce it in similar provinces with an incumbent mayor from the opposition parties. This effect only exists in corporate lending as opposed to consumer loans, suggesting that tactical redistribution targets job creation to increase electoral success. Political lending influences real outcomes as credit-constrained opposition areas suffer drops in employment and firm sales. There is substantial misallocation of financial resources as credit constraints most affect provinces and industries with high initial efficiency.
Discussant(s)
Laura Solanko
,
Bank of Finland
Jan Zimsky
,
New York University
Felix Noth
,
IWH Halle
Iikka Korhonen
,
Bank of Finland
JEL Classifications
  • P0 - General
  • G2 - Financial Institutions and Services