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Political connections and preferential lending at local level: Some evidence from the Italian credit market

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  • Infante, L.
  • Piazza, M.

Abstract

We investigate the effect of political connections in Italy, for each level of government, on the credit markets and we find robust evidence that politically connected firms benefit from lower interest rates when the political link is at a local level. Our results show that this preferential treatment is stronger when connected firms borrow from banks with politicians on their boards and when the degree of autonomy granted to local loan officers is higher. The latter result provides a novel addition to the literature on the effects of the delegation of lending decisions within the bank. We also show that the effect is stronger in geographical areas where the incidence of corruption is higher. Overall, our results show that on aggregate the impact of political connections on interest rates is limited but it may rise significantly in specific (local) situations due to a combination of factors such as the delegation of lending decisions, a weaker rule of law and some governance characteristics of banks.

Suggested Citation

  • Infante, L. & Piazza, M., 2014. "Political connections and preferential lending at local level: Some evidence from the Italian credit market," Journal of Corporate Finance, Elsevier, vol. 29(C), pages 246-262.
    • Handle: RePEc:eee:corfin:v:29:y:2014:i:c:p:246-262
    DOI: 10.1016/j.jcorpfin.2014.06.003
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    More about this item

    Keywords

    Political connections; Banking; Preferential lending; Delegation of lending decisions;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G3 - Financial Economics - - Corporate Finance and Governance
    • D7 - Microeconomics - - Analysis of Collective Decision-Making
    • H7 - Public Economics - - State and Local Government; Intergovernmental Relations

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