A theory of political connections and financial outcomes

I model the effect of political connections through the channels of lender compensation, contract enforcement, and social objectives on financial outcomes such as interest rates, default rates, financial constraints, investment decisions, and the manager's decision about whether to be politically connected or unconnected. The model shows that the effect of political connections on financial outcomes depends upon the relative importance of each channel. By demonstrating the influence of each channel, the model helps explain many contradictory empirical findings about the relationship between political connections and financial outcomes.