Does campaign finance imply political favors?

This paper provides empirical evidence that campaign contributions arestrongly associated with market expectations of future firm-specific political favors,including preferential access to external financing. Using a novel dataset, we find thatfirms in Brazil providing contributions in the 1998 campaign to (elected) federal deputiesexperienced higher stock returns following the election, even after controlling forindustry-specific effects and firm-specific controls. This suggests that federal deputieswere expected to shape policy to benefit these firms in particular. Consistent with suchpolitical favors, we find that these firms relative to a control group substantially increasedtheir financial leverage in the four years following election, suggesting that contributionsgained firms preferential access to finance.