We show that politically connected banks influence economic activity. We exploit shocks to individual banks’ political capital following close U.S. congressional elections. We find that regional output growth increases when banks active in the region experience an average positive shock to their political capital. The effect is economically large, but temporary, and is due to lower restructuring in the economy, not increased productivity. We show that eased lending conditions (especially for riskier firms) can account for the growth effect. Our analysis is a first attempt to directly link the politics and finance literature with the finance and growth literature. (JEL, D72, E65, G21, G28, O43, O51).

Does partisanship influence loan allocation through the Paycheck Protection Program (PPP)? We examine the 2020 Presidential campaign contributions made by lenders’ employees as a partisanship measure and leverage the PPP’s phased implementation under both the Trump and the Biden administrations. We find that partisan misalignment increases lending, particularly to small and first-time PPP borrowers, as well as those in Republican areas. Misalignment is also associated with higher payroll coverage for small businesses. Our findings are consistent with Republican-leaning lenders viewing the PPP’s 2021 phase as a legacy policy of the prior administration, shedding new light on the partisan-alignment phenomenon in finance.

Documenting the US antitrust review process for M&As in rich detail, we unveil that regulatory costs and risks are significant and that mitigating these risks via lobbying by acquirers may benefit shareholders. Our results show that an adverse antitrust review outcome leads to a decline of 2.8% in acquirer firm value. Further, we show that lobbying before deal announcements is associated with more favorable review outcomes. Finally, higher pre-announcement lobbying is valued by shareholders, especially in horizontal deals and deals with a larger expected change in market concentration, which have higher antitrust concerns. However, this positive value effect of lobbying applies only in firms with strong corporate governance. Our results highlight the role of political connections and lobbying for corporate investments when facing regulatory costs and risks.

We study how banks’ special interests affect the resolution of failed banks. Using a sample of FDIC auctions between 2007 and 2016, we find that bidding banks that lobby regulators have a higher probability of winning an auction. However, the FDIC incurs larger costs in such auctions, amounting to 24.8 percent of the total resolution losses. We also show that lobbying winners match less well with acquired banks and display worse post-acquisition performance than their non-lobbying counterparts, suggesting that lobbying interferes with an efficient allocation of failed banks. Our results provide new insights into the bank resolution process and the role of special interests.