Political connections and preferential access to finance: The role of campaign contributions

Abstract: We provide empirical evidence that campaign contributions are strongly associated with market expectations of future firm-specific political favors, including preferential access to external finance. Using a novel dataset, we find that Brazilian firms providing more contributions in the 1998 campaign to (elected) federal deputies experienced higher stock returns following the election, even after controlling for industry-specific effects and firm-specific characteristics. This suggests that federal deputies were expected to shape policy and actions to benefit particular firms. Consistent with such political favors, we find that these firms substantially increased their financial leverage relative to a control group in the four years following election, especially from banks, suggesting that contributions gained firms preferential access to finance