Bank Influence at a Discount

Hans Gersbach and Stylianos Papageorgiou

Journal of Financial and Quantitative Analysis, 2024, vol. 59, issue 6, 2970-3000

Abstract: 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.

Date: 2024
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