Does campaign finance imply political favors? The case of the 1998 Brazilian elections

This paper provides empirical evidence that campaign contributions are strongly associated with expectations of future firm-specific political favors. Using a novel dataset, we find that during the 1998 elections in Brazil higher campaign contributions to federal deputies were robustly associated with higher stock returns of contributing firms around the announcement of the election results, even after controlling for industry-specific effects. This suggests that the stock market expects federal deputies to shape policy according to the benefits of their campaign donors, not to their a priori political ideology. In addition, we find some support for a positive effect of contributions to governors and senators on stock returns of contributors.