Abstract
Borrowers from the same state as the Chairman of the U.S. Senate Banking Committee, whom I term connected, are able to borrow at spreads 14 bps lower than other borrowers. 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 reelection to actively help connected borrowers obtain cheaper loans. Banks that offer a larger fraction of connected loans enjoy higher future excess stock returns. Results are consistent with the existence of a quid pro quo relationship triangle between firms, banks, and politicians.
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