Title

Political connections and the cost of bank loans

Document Type

Journal article

Source Publication

Journal of Accounting Research

Publication Date

3-1-2014

Volume

52

Issue

1

First Page

193

Last Page

243

Abstract

This paper analyzes whether the political connections of listed firms in the United States affect the cost and terms of loan contracts. Using a hand-collected data set of the political connections of S&P 500 companies over the 2003–2008 time period, we find that the cost of bank loans is significantly lower for companies that have board members with political ties. We consider two possible explanations for these findings: a Borrower Channel in which lenders charge lower rates because they recognize that connections enhance the borrower's credit worthiness and a Bank Channel in which banks assign greater value to connected loans to enhance their own relationships with key politicians. After employing a series of tests to distinguish between these two channels, we find strong support for the Borrower Channel but no direct evidence supporting the Bank Channel. Finally, we demonstrate that political connections reduce the likelihood of a capital expenditure restriction or liquidity requirement commanded by banks at the origination of the loan. Taken together, our results suggest that political connections increase the value of U.S. companies and reduce monitoring costs and credit risk faced by banks, which, in turn, reduces the borrower's cost of debt.

DOI

10.1111/1475-679X.12038

Print ISSN

00218456

E-ISSN

1475679X

Publisher Statement

Copyright © University of Chicago on behalf of the Accounting Research Center, 2014

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Recommended Citation

Houston, J. F., Jiang, L., Lin, C., & Ma, Y. (2014). Political connections and the cost of bank loans. Journal of Accounting Research, 52(1), 193-243. doi: 10.1111/1475-679X.12038