TARP Investments: Financials and Politics

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Abstract
We investigate the determinants of capital allocation to financial institutions under the Troubled Asset Relief Program (TARP). Our main finding is that banks’ political ties played a significant role in the distribution of TARP funds. Specifically, connections to House members on finance committees and representation at the Federal Reserve via board members are positively related to the likelihood of receiving TARP capital. The TARP investment amounts are positively related to banks’ size-adjusted political contributions and lobbying expenditures. The effect of political influence is the strongest for poorly performing banks, thus shifting capital allocation toward weaker institutions. Overall, the study provides evidence about various channels through which political activism affects government spending.

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