U.S. Political Corruption And Loan Pricing

Using U.S. Department of Justice data on state‐level political corruption, we find that banks charge higher loan spreads (all‐in‐drawn spreads) to firms in states with higher corruption and that these effects are more pronounced for firms facing financial constraints but less pronounced for firms experiencing greater external monitoring. These results are robust to additional controls, alternative corruption measures, a measure of the lack of oversight of lobbyist activities, and the use of instrumental variables. Overall, our findings are consistent with the harmful corruption environment hypothesis, which states that banks charge higher loan spreads to firms in states with greater political corruption environments as these firms are susceptible to making suboptimal financial decisions to fend off rent‐seeking behavior.