Political capital and moral hazard

Leonard Kostovetsky

Journal of Financial Economics, 2015, vol. 116, issue 1, 144-159

Abstract: This paper examines how political connections affect risk exposure of financial institutions. Using a geography-based measure, I find that politically connected firms have higher leverage and their stocks have higher volatility and beta. Furthermore, prior to the 2008 financial crisis, politically-connected financial firms had higher leverage and were more likely to increase their leverage during the housing bubble in response to local growth in median housing prices. During the crisis, higher leverage was associated with worse performance but being in a state with a US Senator on the Banking Committee was correlated with weakly improved stock returns and reduced bankruptcy probability, highlighting the value of political connections for financial firms.

Keywords: Moral hazard; Financial crisis; Bank leverage; Political connections; Risk taking (search for similar items in EconPapers)
JEL-codes: G01 G18 G21 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (52)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:116:y:2015:i:1:p:144-159

DOI: 10.1016/j.jfineco.2014.12.003

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