Abstract
We explore whether banks use loans as a tool for political influence. Using close elections as our setting, we show that firms linked to members of Congress receive lower interest rates on new loans, which are also larger and have fewer covenants. Such firms, however, do not experience improvements in future performance or reductions in default risk. The impact of political connections is greater for important politicians, for firms that are large contributors, and when both are from the same state. Consistent with banks seeking influence through preferential lending to politically connected firms, the effect is also stronger for banks with regulatory problems, during the TARP period, and for banks with a history of bailouts. Furthermore, such banks lend more frequently to connected firms.
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