Print
E-MailAhmed Tahoun is Assistant Professor of Accounting at London Business School, and Florin P. Vasvari is Term Professor of Accounting at London Business School. This post is based on a recent paper authored by Professor Tahoun and Professor Vasvari.
In a new paper, Political Lending, we investigate a previously unexplored channel that could be used by firms to enhance the wealth of individual politicians: the amount and terms of the personal debt taken on by politicians and their close family members. Personal debt is economically significant as liabilities are close to 40% of the overall net worth of the average U.S. congressional member.
We focus on the borrowing activities of politicians that join the finance committees in the Senate and the House of Representatives of the U.S. Congress (finance committee going forward). An investigation of the extent to which financial institutions lend to politicians is interesting for several reasons. First, congressional members on the finance committees could face greater conflicts of interest when taking personal debt given that these committees oversee the entire financial services industry in the U.S., including the securities, insurance, banking, and housing industries. Finance committee members potentially take actions that directly influence the regulatory environment in which their lenders, the banks, operate (e.g., Kroszner and Stratmann, 1998). Second, the U.S. is considered to be one of the countries with very strong institutions that monitor and hold politicians accountable (e.g., Djankov et al., 2010). In particular, the laws and regulations in the U.S. prohibit congressional members and their staff from accepting preferential loans. Third, members of the U.S. Congress are required by the Ethics in Government Act of 1978 to file annual reports detailing their income, assets, liabilities, and other relevant information about their personal finances. This disclosure requirement allows us to observe all liabilities assumed by the congressional members including some of the important contractual characteristics of these liabilities and the names of the banks that provided them.
We first document that finance committee members report more new liabilities and a higher overall level of debt as a proportion of their net worth during their committee membership relative to other congressional members. Compared to their net worth, politicians in finance committees report increases in new liabilities and the level of leverage by over 30% during their membership. We also find that, controlling for politician fixed effects, these politicians obtain significantly more new liabilities in the year of joining the committee and the following year relative to the years prior to their committee membership suggesting that self-selection is unlikely to drive our results. We do not find that other powerful congressional committees borrow more during their committee appointment. This evidence indicates that congressional members’ decisions to borrow more and lenders’ willingness to lend are not due to the higher visibility or income associated with membership in a powerful committee but rather to the relevance of the committee’s activities to the lenders. Overall, our evidence suggests that finance committee membership is associated with the decision to incur more debt.
We also assess whether finance committee members receive more favorable lending terms. We find that, relative to both the liabilities reported by finance committee members in other periods and to non-committee congressional members, the liabilities reported in the year of joining the committee have a significantly longer maturity. These maturities are 32% longer than the maturities reported in other years. In addition, we find that finance committee members pay significantly lower interest rates on the debt reported in the year of their committee appointment. The economic magnitude of these results is significant, with the interest rates on the liabilities reported in the year of joining being lower by 58-66 bps than the interest rates on debt instruments issued in other years.
In our last analysis, we exploit the fact that congressional members’ disclosures reveal the name of their lending institution. Specifically, we examine the characteristics of the banks that lend to finance committee members. We capture the aggregate characteristics of these banks through an index that measures the extent to which the bank has poor profitability (return on assets), weak capital ratios, and risky assets in the year previous to lending to a congressional member. We find that banks with worse performance provide new liabilities to more finance committee members than to other congress members. In addition, underperforming banks lend greater amounts of new debt to finance committee members. We do not find any effect regarding their lending to congressional members on other congress members. Our results indicate that these banks might expect benefits from their lending to finance committee members who potentially have greater ability to influence financial regulation.
While our results indicate that US Congress members take significantly more loans with favorable terms when they join the finance committees, our analyses do not provide any insights on the consequences of this borrowing. It is challenging to assess whether the additional debt taken by finance committee members contributes to a biased law making process in a meaningful way given the multitude of activities politicians engage in and the long period over which these activities take place. Furthermore, data on politicians’ views and influence in committee meetings that could indicate potential regulatory benefits for the lending banks is unavailable.
Our paper adds to the literature on the wealth accumulation of politicians by showing that U.S. politicians who influence bank regulation might enhance their personal wealth by borrowing from regulated banks. While our work does not directly demonstrate that debt taken by politicians contributes to their higher wealth, researchers have shown that household debt financing is associated with a higher return on assets and thus greater wealth (e.g., Pawasutipaisit and Townsend, 2011). The paper also contributes to the literature on the exchange of benefits between politicians and firms. Prior work has shown that firms contribute to politicians’ (re)election campaigns, employ more people, time the opening and closing of plants in the politician’s district (Bertrand et al. 2006) or increase their lending activity during election years to help incumbent politicians get reelected (Dinç 2005). Our results show another form of influence that financial institutions in particular can potentially use to obtain benefits from politicians, namely the provision of personal lending to politicians.
The full paper can be downloaded here.
