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Bank Influence at a Discount

Published online by Cambridge University Press:  03 May 2023

Hans Gersbach  and
Stylianos Papageorgiou
Hans Gersbach
Affiliation:
ETH Zurich, KOF, and CER-ETH – Center of Economic Research and CEPR hgersbach@ethz.ch
Stylianos Papageorgiou*
Affiliation:
University of Cyprus Department of Accounting and Finance
*
papageorgiou.stylianos@ucy.ac.cy (corresponding author)
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Abstract

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In a general equilibrium framework, we show that banks may “buy” political influence at a discount: They offer disproportionately small campaign contributions compared to the influence they exert, thus generating abnormal returns. We distinguish between the direct effect of contributions which, as a cost, reduce bank returns, and the indirect effect of contributions which boost returns via inducing bank-favoring policies. Therefore, abnormal returns may or may not increase with the amount of contributions, depending on which effect dominates: Stricter capital requirements decrease contributions and abnormal returns. When politicians attach more weight to households’ welfare, contributions increase and abnormal returns decrease.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 59 , Issue 6 , September 2024 , pp. 2970 - 3000
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2023. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

We are grateful to an anonymous referee and Mara Faccio (the editor), whose comments and suggestions helped improve the article. We thank Volker Britz, Hugo van Buggenum, Alexander Michaelides, Andrea Musso, Jean-Charles Rochet, Haresh Sapra, Javier Suarez, seminar participants at ETH Zurich and the University of Cyprus, and participants at the 2019 European Meeting of the Econometric Society for valuable comments.

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