Politics and Finance

Rising government intervention, corporate political spending, and geopolitical rifts underscore the importance of the link between politics and finance. This review describes how politics affects firms, banks, households, and markets. Companies form political ties through board connections, lobbying, revolving-door hires, and contributions. In return, they gain access to procurement contracts, cheaper debt, bailouts, policy information, and reduced enforcement. Political ties are generally associated with increased shareholder value but can also be costly during periods of political disruption. Political factors spill over to banking, where banks favor connected firms and secure regulatory forbearance; to households, whose partisan beliefs shape investments; to asset markets, which price political risk; and to global capital markets, where investment and banking flows respond to geopolitical risks. We conclude with open questions, including which types of money matter most in politics, how politics influences relational contracts, and how to integrate political economy factors into finance theory.