-Political Connections and Corporate Bailouts by Mara Faccio, Ronald Masulis, John McConnell

SSRN-Political Connections and Corporate Bailouts by Mara Faccio, Ronald Masulis, John McConnell:

Faccio, Masulis, and McConnell report that politically connected firms are more apt to receive government bailouts. This fits with prior evidence that leverage ratios at politically connected firms are higher. Thus, it may be inferred that lenders are more apt to make loans if they feel that the government will bail the firm out if things go bad.

While not surprising, it is VERY interesting.

A look in:

The paper is a "systematic examination of the link between political connections and
corporate bailouts. To do so, we study 450 politically-connected firms in 35 countries over the six-year period 1997-2002 along with a set of matching peer firms."

On why firms with connections have higher leverage:

"The anecdotal and empirical evidence that politically-connected firms make greater use of leverage is subject to a number of possible interpretations. One possibility is that lenders are irrational. A second is that they are coerced into making poor loans to politically-connected enterprises. A third is that lenders receive offsetting government benefits for making such loans. Yet another possibility is that lenders factor into their lending decisions the likelihood that borrowers will be bailed out when they encounter economic distress and, thus, lend more to politically-connected firms who are, in turn, more likely to be bailed out than their nonconnectedpeers."

"The evidence that we present is consistent with the last interpretation: politically-connected firms do borrow more than non-connected firms...our evidence indicates that lenders are willing to lend more to connected borrowers because they can reasonably anticipate a future bailout of troubled loans...."

BUT

"the data do not rule out the possibilities that lenders may also sometimes be pressured into making weak loans and/or that lenders may receive benefits in other forms."

See, I told you it was interesting!

Cite:
Faccio, Mara, Masulis, Ronald W. and McConnell, John J., "Political Connections and Corporate Bailouts" (March 1, 2005). AFA 2006 Boston Meetings Paper http://ssrn.com/abstract=676905

BTW while this has a March date, it appears to have been just updated on Sept 16.