The results are largely consistent with the _“Quid Pro Quo”_ hypothesis. As expected, banks with high level of public loans get more "business" from the government and lend out a significantly larger volume of public loans (by 13 percent as shown in columns 1 and 2 of Panel A). More interestingly, we find that these public loans are generally of better credit quality, as indicated by the significantly lower default rate (0.8 percent lower) in column 10. The results on other loan terms are not robust across different specifications, though column 6 of Panel A suggests significantly longer maturity for public loans made by banks with high level of public loans.

To sum up, our results suggest a specific channel of rewards in the form of government borrowing, with larger volume and better credit quality for banks that offer political rents and extend favorable lending to politically connected firms. Nevertheless, we should caution that the results here do not aim to establish the sequence of whether “the politicians offer rewards to the bank” or the “bank provides favorable lending to politically connected firms” comes first.

# **_V_ .E. Real Effects of the Political Lending**

In this section, we investigate whether the effects of political connections in the loan market can translate into effects on real outcomes for the borrowers. Starting from Bernanke (1983), much of the macroeconomic and finance literature examines how the credit channel can propagate shocks to lending institutions into outcomes in the real economy. However, the data limitations have made it difficult to identify the effect on the borrower’s economic outcomes with a few exceptions.<sup>32</sup> We study the impact of political lending on firms’ outcomes using a vast sample of matched bank-firm data that merges the loan database with balance sheet information of the borrower. The specification is presented in Equation 4: where ��,� corresponds to the firm-level information including assets, liabilities, revenue and employment. The variables are available at the annual frequency and collected from Orbis, which includes a rich set of financial and ownership information for both public and private firms around the world. The variable of interest ���������,� indicates if the state _s,_ where the firm _f_ is located, has at least one senator as the chairman at the year _t_ . We cannot include firm*year fixed-effects as they would absorb the main independent variable. So we saturate the specification with fixedeffects at the firm level to control for time-invariant unobservable firm characteristics and also use year fixed-effects to exclude the overall effect of time. _β1_ is our main coefficient of interest and an estimate statistically significant from zero would imply that the preferential treatment to politically

> 32 Gan (2007) and Almeida et al (2012) document contraction in investment in affected borrowers but focus only on firms that have regulatory filings with borrower-level information. Chodorow-Reich (2014) relies on the 2008 financial crisis as shock to credit supply and show that it has a significant effect on employment at small and medium firms. Carvalho (2014) shows in the context of Brazil that firms expand employment near election in exchange for government bank loans.

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