Essays in Finance and Politics

Abstract

The first chapter explores the extent to which campaign contributions to politicians in the financial sector can influence the economic performance of the banks. In this paper, I study the relationship between campaign contribution, probability of failure and portfolio investment. I find that there is a significant effect of campaign contributions on the probability of failure and riskier investment portfolio using U.S. state banks. This effect is more pronounced for smaller and less geographically diversified banks. The results are robust for the overall risk taking measure ($Z-score$ and volatility of the return). The result is also robust using the magnitude of contributions. Using bivariate model and Blundell-Bond estimate to control for endogeneity of campaign contributions, I find that the results are robust.

Using US legislative data on congressmen from congress.gov, the second chapter (co-authored with Aggey Semenov) investigates the effect of U.S. Congress legislators' non roll--call activity in bill sponsorship and co--sponsorship on campaign contributions from the financial industry. We found that bill sponsorship has positive and significant effect on campaign contributions in both Chambers. Co--sponsorship has positive and significant effect on contributions in the House but not in the Senate. We link this observation to a longer term of senators compare to congressmen; senators have more time to engage in more profitable sponsorship than congressmen. Legislators' efficiency in promoting bills to laws is rewarded by the financial industry. We also conduct robustness checks.

Motivated by a large literature on the determinants of Foreign Direct Investment (FDI), the third chapter (co-authored with Roland Pongou) is assigned to understand whether a leader's longevity in office promotes FDI inflows? We answer this question with a novel dataset on the personal characteristics of African leaders covering the period from 1960 to 2011. We find that political longevity increases FDI inflows. The effect is robust to controlling for leader heterogeneity using leader fixed effects. The results remain unchanged when using plausible instrumental variables for political longevity to address possible endogeneity issues, and when estimating a dynamic model. Importantly, the effect of longevity on FDI inflows is only positive for more democratic regimes. Exploring the mechanism, we find that longevity of leaders improves the rule of laws, bureaucracy, property rights, and infrastructure, and reduces corruption. We also find that unobserved characteristics of leaders such as his ability play a role in its longevity and the improvement of institutions.