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[Lecture] Political Connections and Resource Allocation in Private Markets: A Social Network Channel

JUN . 05 2019
Title: Political Connections and Resource Allocation in Private Markets: A Social Network Channel

Speaker: David Schoenherr, Princeton University

Time: Wednesday, 5 June, 10:00-11:30

Venue: Room 217, Guanghua Building 2

Abstract: In this paper, we assess how politically connected firms benefit from better access to resources in private markets. After the election of a new president in Korea in 2007, we observe that private banks appoint executives from the his alumni network following the appointment of members of his alumni network into important positions in the administration. This leads to an increase in social connections to the banking sector for private firms with a CEO from the new president’s alumni network. These firms obtain more credit at a lower rate from private banks that appoint an executive from the same alumni network after the election. Additionally, banks protect connected firms from default through renegotiating existing loans and extending new credit that is used for refinancing existing debt rather than profitable investment. Despite the lower rates and banks’ higher willingness to renegotiate firms’ debt, loans from banks to firms connected through the president’s alumni network are more likely to default after the election. Overall, our findings suggest that the election of a president from their network increases the influence of the alumni network over resource allocation in private markets, which leads to more resources being (mis-)allocated to firms run by fellow alumni.

IntroductionDavid Schoenherr joined the Economics Department at Princeton University as Assistant Professor in September 2016. Schoenherr's research interests include financial contracting, political economy, and the interaction between law and finance. He is particularly interested in how the design of bankruptcy law affects security prices and investors' ex ante incentives, for example with respect to credit allocation decisions, or firms' financing and investment decisions. His work examines the role of scoial and political connections on economic outcomes in differnt contexts, as well as how informal labor markets affect the incentives of workers in response to changes in unemployment insurance benefits. His research has been published in the Journal of Finance, the Journal of Political Economy, and the Review of Financial Studies. He holds a Ph.D. in finance from the London Business School.

Edited by: Qiu Tianjie, Huang Weijian
Guanghua School of Management