Do Lenders Favor Politically Connected Firms? Rent Provision in an Emerging Financial Market

Abstract

Corruption by the politically connected is often blamed for economic ills, particularly in less developed economies. Using a loan-level data set of more than 90,000 …rms that represents the universe of corporate lending in Pakistan between 1996 and 2002, we investigate rents to politically connected …rms in banking. Classifying a …rm as “political”if its director participates in an election, we examine the extent, nature, and economic costs of political rent provision. We …nd that political …rms borrow 45 percent more and have 50 percent higher default rates. Such preferential treatment occurs exclusively in government banks - private banks provide no