Finance: Research, Policy and Anecdotes

The past two days saw our first London Political Finance workshop, co-organised by Orkun Saka, Paolo Volpin and I – on-line rather than in person. We had nine excellent papers plus a keynote speech by Sir Tim Besley on the political economy implication of the COVID-19 crisis responses.  I will not discuss all the papers in this blog entry but focus on a few that were especially interesting for me.

The first session featured two interesting papers on the rise of right-wing populist parties in the wake of bank failures.  First, Hans Joachim Voth and co-authors use micro-level data to relate a banking crisis in 1931 and the electoral rise of the Nazi Party in Germany. Two large banks were at the core of the crisis, Danatbank and Dresdner Bank. Cities with a higher share of firms connected to either bank saw larger income declines, and unemployment rose more. However, only towns and cities affected by the failure of Danatbank (which had a Jewish CEO) show evidence of voting for the Nazis above and beyond economic factors.  This can be directly linked to Nazi propaganda blaming the economic and financial crisis on the Jewish population.  The second paper in the same session by Emil Verner links borrower fragility post-2008 in Hungary to the rise of the right-wing Jobbik. Before 2008, a mortgage credit boom in Hungary was driven by Swiss-Franc loans (lower interest rates), with both lenders and borrowers counting on the Hungarian Forint to appreciate vis-à-vis the Swiss Franc over time (in line with the Samuelson-Balassa effect). When in the wake of the Global Financial Crisis the Forint depreciated, Swiss Franc borrowers suffered. Using exogenous variation in the attractiveness of Swiss Franc loans, the authors then show how the post-2008 fragility is correlated with the geographic variation in the rise of the right-wing Jobbik party.

Travers Barclay Child and c-authors use the surprise of Donald Trump’s election in 2016 to identify the value of sudden connectedness to the US President among S&P 500 firms with pre-existing ties to the businessman Trump. They show that Trump-connected firms (though only business- and not socially related) had significantly higher abnormal stock returns around the 2016 election than their nonconnected counterparts, which translates to $1.2 and $2.4 billion in wealth creation for shareholders. Since Trump’s inauguration, connected firms showed better performance, were more likely to receive government procurement contracts, and were less subject to unfavourable regulatory actions.

Two interesting papers focused on the role of the media. April Knill and co-authors show that partisanship in television coverage influences corporate decisions. Specifically, Fox News has a clear bias in favour of Republican presidents. Exploiting the fact that the Fox News channel was not available across all of the US, they show that during George W. Bush’ presidency,  firms led by Republican-leaning managers headquartered in regions into which Fox was introduced shift upward their total investment expenditures, R&D expenditures, and leverage, compared to firms led by Republican-leaning managers headquartered elsewhere.  Ruben Durante and co-authors consider media capture by banks. Specifically, considering a sample of top European newspapers and linking them to their creditor banks, they shows that newspapers’ coverage of bank earnings announcements of their lender banks, relative to other banks, are significantly more likely to be the case in case of profits than in case of losses. This pro-lender bias is stronger for newspapers that are highly leveraged. This bias also carries over to the Eurozone crisis, when newspapers connected to banks more heavily exposed to stressed sovereign bonds are less likely to portrait banks as being responsible for the crisis and to support debt-restructuring measures detrimental to creditors.

Overview