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Personal Wealth Interests of Politicians and Government Intervention in the Economy: The Bailout of the US Financial Sector

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Abstract

We examine whether the incentives derived from equity ownership affect politicians’ decisions about government intervention in the economy. We investigate this question in the context of the government’s support to financial institutions under the Emergency Economic Stabilization Act (EESA). We find that the equity ownership of members of the House of Representatives, but not the Senate, is positively associated with voting in favor of key legislative proposals to bailout the financial sector. We show that the effect that equity ownership has on voting likely reflects a politician’s personal wealth interests and is separate and distinct from other economic incentives that derive from constituent and special interests. In a sample of 555 publicly listed financial institutions, we also find that the equity ownership of Congress members seated on financial sector-related committees is positively associated with both the amount of bailout these institutions receive, as well as the timing of that bailout. We can attribute this finding to the investments of the chairpersons and ranking members of these committees.

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... In the United States, both significant government ownership (Borisova et al., 2015;Houston et al., 2011) and bank lending under government influence (La Porta et al., 2002;Serdar Dinç¸ 2005;Beck et al., 2006) are less prevalent. Recently, studies have found quicker and higher bailouts (Tahoun and Van Lent, 2018) (Faccio, 2006;Goldman et al., 2013;Tahoun, 2014), are related to the cost of borrowing through bond markets. Using the Compustat Segment Customer Database, we identify whether a firm serves as a supplier to government agencies (i.e. has government agencies as its customers). ...
... connected to winners (Democratic Party) received better loan terms, while firms connected to losers (Republican Party) received worse loan terms. Tahoun and Van Lent (2018) find that U.S. firms invested in by key politicians receive quicker and larger bailouts. This is consistent with several global studies on the PCFs' cost of debt: PCFs are deemed too politically important to fail (Faccio et al., 2006;Borisova and Megginson, 2011;Iannotta et al., 2013;Acharya et al., 2015) and receive implicit government guarantees. ...
... Alternatively,Houston et al. (2014) find that PCFs receive lower-cost bank loans in the United States.Tahoun and Van Lent (2018) find that U.S. PCFs receive quicker and larger bailouts.PCFs have been found to be too politically important to fail(Faccio et al., 2006;Borisova and Megginson, 2011; Iannotta et al., 2013;Acharya et al., 2015) and to receive implicit government guarantees. The effect on the overall sample of government suppliers, whether it is the bail ...
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In a 1991–2013 sample of bonds issued by U.S. public firms, we find that the cost of debt (yield spread relative to comparable Treasuries) of suppliers to government agencies is contingent on the strategic importance of the supplier's industry. The yield spreads for strategically unimportant government suppliers are higher than for firms that are not government suppliers. If government contracts serve as tangible evidence of political connections, these higher yield spreads indicate that weaker corporate governance as a cost of political connections outweighs the benefits of said connections. For the subsample of government suppliers from strategically important industries, where the benefits of implicit bailout guarantees and revenue stability outweigh the corporate governance problems, the cost of debt is lower than for firms that are not government suppliers. The higher (lower) cost of debt for strategically unimportant (strategically important) suppliers is confined to contracting with the federal government. Our findings are robust to alternative variable and sample specifications, and to endogeneity concerns. This article is protected by copyright. All rights reserved
... For instance, Khwaja andMian (2005) andClaessens et al. (2008) report preferential access to finance and banks loans for connected firms, while Correia (2014) shows that they incur lower costs from public enforcement actions . Goldman et al. (2013), Tahoun and Van Lent (2013), and Tahoun (2014) provide evidence that such firms have a higher probability of obtaining government contracts or to be bailed out. ...
... For instance, Khwaja and Mian (2005) and Claessens et al. (2008) report preferential access to finance and banks loans for connected firms, while Correia (2014) shows that they incur lower costs from public enforcement actions. Goldman et al. (2013), Tahoun and Van Lent (2013), and Tahoun (2014) provide evidence that such firms have a higher probability of obtaining government contracts or to be bailed out. To our knowledge, our paper is the first to depart from this literature by examining how political connections affect directors themselves. 1 Under the rational framework developed by Becker (1968), individuals decide to break the law if the expected benefits from doing so are larger than the expected costs, which combine the incurred punishment and the probability of getting caught. ...
... Empirically, Gordon and Hafer (2005) report lower investigation rates by the Nuclear Regulatory Commission for firms that contribute to political campaigns, while Correia (2014) finds that firms with long-term political connections incur lower costs from the enforcement actions by the Securities and Exchange Commission (SEC). Some studies, such as Khwaja and Mian (2005) and Claessens et al. (2008), argue that politically-connected firms have a preferential access to finance and banks loans, while Tahoun and Van Lent (2013) document that financial institutions in the portfolios of key committee members of the US Congress received higher and quicker bailouts during the financial crisis. Finally, Goldman et al. (2013), Boas et al. (2014), andTahoun (2014) provide evidence that connected firms receive more government contracts. ...
Thesis
This dissertation is composed of three distinct chapters that empirically investigate various forms of decision-making by firms and/or managers in the field of empirical financial accounting. The first chapter presents a work joint with Francois Brochet and Sven Michael Spira, analyzing how the risk of securities lawsuit for investment-related reasons disciplines managers and reduce agency concerns with respect to investment. The second chapter examines how changes in labor regulation affect managers’ incentives to manipulate earnings using other tools that are ultimately detrimental to firms. The third chapter, joint with Renaud Coulomb and Marc Sangnier, explores how political connections lead directors to engage in plausibly fraudulent insider trading in financial markets.
... Given the interest alignment between firms and stockholding politicians, it is perhaps not surprising that "legislators who have a direct interest in firms often vote quite differently than other, uninterested legislators on legislation that impacts the firms in question" (Cohen et al., 2012: 24). Indeed, extant work has focused on politicians' use of their positions for self-interest to advance or stall legislation that affects their personal wealth or because they have inside information that they can use to their financial benefit (e.g., Buchanan & Tullock, 1965;Downs, 1957;Keim & Zeithaml, 1986;Schweizer, 2011;Tahoun & van Lent, 2011;Ziobrowski et al., 2004). In either case, if politicians use their positions to support their personal wealth or use inside information to gain financial payoffs, owning stock in a focal firm, and the inherent alignment of the politicians' personal wealth with the firm's performance, provides a credible signal about the intentions of stockholding politicians. ...
... Given that politicians and firms interests are aligned when politicians own a focal firm's stock, we argue that politician stockholding acts as a signal to the focal firm to then decrease efforts to sway politicians to act in ways beneficial to the firm. Although a wealth of prior research supports the contention that politicians gain personal financial benefits from either the advancing/stalling legislation or inside information (e.g., Buchanan & Tullock, 1965;Cohen et al., 2012;Downs, 1957;Keim & Zeithaml, 1986;Schweizer, 2011;Tahoun, 2014;Tahoun & van Lent, 2011;Ziobrowski et al., 2004), in Table 4 we test the assumption of interest alignment in the sample utilized in our study and in the context of stockholding. Specifically, in the models labeled Positive Outcome Assumption in Table 4, using politician ownership and all other control variables in time t and two measures of firm performance (ROA and approximate Tobin's Q; Richard, Devinney, Yip, & Johnson, 2009) in time period t + 1 as the dependent variables, we find a significant and positive effect (p < .001), ...
... Yet our findings suggest that if firms influencing politicians via donations is under question, so too should be politician stockholdings. As such, our findings build on prior research demonstrating that politicians are subject to self-interested biases associated with stock ownership such that as their personal interests are tied to a firm, they will likely support policies that are beneficial to the firm (e.g., Barley, 2007;Buchanan & Tullock, 1965;Cohen et al., 2012;Downs, 1957;Keim & Zeithaml, 1986;Tahoun & van Lent, 2011;Ziobrowski et al., 2004). ...
Article
Adopting a signaling theory perspective, we argue that politician stock ownership sends signals of positive predispositions to firms, thereby alleviating some necessity for firms to emphasize lobbying expenditures to influence political action. Using data on congressional stock ownership, we find support for our arguments. We find that as the proportion of Congress owning stock in a firm increases, the firm decreases the intensity of lobbying. Furthermore, we find that the signals associated with stock-holding politicians with greater ability to affect the legislative agenda (i.e., affiliation with the majority party) relates to lobbying intensity. Our findings add to the literature on lobbying while also offering implications for practice and avenues for future research.
... The paper also provides additional evidence on donor agencies' influence & lack of funding, and the existence of multiple regulators in the implementation of IFRSs. The findings are consistent with prior studies regarding the lack of enforcement and political influence in enforcement in developing countries (Belkaoui, 1983;Braun & Raddatz, 2010;Correia, 2014;Leuz & Oberholzer-Gee, 2006;Muniandy & Ali, 2012;Prather-Kinsey, 2007;Saudagaran, 2009;Saudagaran & Diga, 2000;Tahoun, 2014;Tahoun & van Lent, 2013;Tondkar, Peng, & Hodgdon, 2003, Wallace & Briston, 1993Wu, Wu, Zhou, & Wu, 2012). This study has at least three policy implications. ...
... The SEC is lenient in terms of enforcement actions if the firm is exhibiting a strong politician ownership-contribution (Tahoun, 2014;Tahoun & van Lent, 2013). In a Malaysian study, Muniandy and Ali (2012) reported that Malaysian firms were predominantly politically connected until the Asian financial crisis in 1997 and these firms had a lack of enforcement. ...
... The interviewees reported that a high level of political connection between the BSEC and the companies is impeding enforcement activities and IFRS compliance (Correia, 2014;Tahoun, 2014;Tahoun & van Lent, 2013;Wu et al., 2012). No significant progress has been made since 1998 towards the development of accounting systems. ...
... Mian, Sufi, and Trebbi [2010] note that ideology is a mechanism that politicians can employ to avoid succumbing to pressure from constituents and special interest groups. Tahoun and Van Lent [2019] document that ideology only affects politicians with very conservative ideological positions. Although prior studies mainly focus on the effects of ideology on politician voting behavior rather than their efforts to influence regulators, it is conceivable that ideology also affects the latter case. ...
... Tahoun and Van Lent [2019] note that politician investment in firms can occur for potential financial gain. Investments in firms that benefit from mergers (such as an acquirer that increases market power) increase judiciary committee member wealth incentives to support a potential merger. ...
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Antitrust regulators play a critical role in protecting market competition. We examine whether the political process affects antitrust reviews of merger transactions. We find that acquirers and targets located in the political districts of powerful U.S. congressional members who serve on committees with antitrust regulatory oversight receive relatively favorable antitrust review outcomes. To establish causality, we use plausibly exogenous shocks to firm‐politician links and a falsification test. Additional findings suggest congressional members’ incentives to influence antitrust reviews are affected by three channels: special interests, voter and constituent interests, and ideology. In aggregate, our findings suggest that the political process adversely interferes with the ability of antitrust regulators to provide independent recommendations about anti‐competitive mergers. This article is protected by copyright. All rights reserved
... Cohen, Coval and Malloy (2011) find that when a politician becomes the chairperson of a powerful committee, the federal spending in his or her state increases (e.g., 24% increase in government contracts). Tahoun and van Lent (2013) document that politicians are more likely to bail out a firm if they hold its stock. Furthermore, the chance of a bailout is higher for firms with investors from powerful congressional committees. ...
... Powerful politicians also have more authority and control in enacting and overseeing legislation that can affect stock prices. An example of such influence is the bailout decisions (Tahoun and van Lent, 2013). Powerful politicians can also acquire information via their connections outside Congress. ...
Article
I examine the stock trades of members of Congress and find that over 2004–2010 the buy‐minus‐sell portfolios of powerful Republicans have the highest abnormal returns, exceeding 35% on an annual basis under a one‐week holding period. Among powerful Republicans, the abnormal returns are mostly concentrated in the portfolios of those with less trading experience. I also find that the positive abnormal returns disappear after the Stop Trading on Congressional Knowledge (STOCK) Act was passed in 2012. My results imply that the STOCK Act affected politicians' incentives to trade on private information, which they acquired through their power and party membership.
... For instance, via the allocation of government procurement contracts (Goldman et al., 2013), by granting improved access to credit from state-owned banks (Claessens et al., 2008;Infante and Piazza, 2014;Coleman and Feler, 2015), or by holding connected firms less accountable for violating laws and regulations (Imai, 2009;Fisman and Wang, 2015;Kim and Zhang, 2016). However, our focus on the interactions between financial reporting regimes and CPCs leads us to concentrate on favors that depend on the connected firm's economic condition (Duchin and Sosyura, 2012;Tahoun and Van Lent, 2019). Positive Accounting Theory predicts that firms attempt to appear financially vulnerable when they are under government scrutiny Zimmerman, 1978, 1986). ...
Article
We analyze the interactions between accounting institutions and corporate political connections (CPCs). We present a model where a costly policy depends on the perceived economic condition of a firm. This policy and the valuation of the firm by capital market participants create incentives for the firm to manipulate its financial reports. A politician has some discretion over the policy and can use it to favor a connected firm. Our analysis reveals that the firm’s financial reporting is determined by the interplay of an accounting standard, enforcement strictness, and the salience of the policy for the firm. The possibility to manipulate the financial reports imposes an upper boundary on the value of political connectedness which does not exist if only truthful reporting is possible. The reason is that a low credibility of reported figures leads only to a weak revision of the policy. In general, the value of CPCs is highest when the financial reporting regime evenly splits between firms in good and bad economic condition. Our analysis further suggests that while connected firms generally report being in good condition more often than non-connected firms do, the effect of CPCs on absolute reporting manipulation depends on policy salience. If policy salience is low, connected firms exhibit a higher absolute degree of manipulation than non-connected firms do; the opposite holds if policy salience is high.
... The literature has shed some light on the channels through which these connections affect rm value. For instance, politically connected rms can receive preferential treatment from public institutions (Gordon and Hafer 2005, Correia 2014and Tahoun and van Lent 2018, obtain more or more pro table government contracts (Goldman et al. 2013, Boas et al. 2014, and Baltrunaite 2020 and enjoy preferential access to nance and bank loans (Khwaja and Mian 2005). ...
Article
This paper investigates whether political connections affect individuals’ propensity to engage in white-collar crime. We identify connections by campaign donations or direct friendships and use the 2007 French Presidential election as a marker of change in the value of political connections to the winning candidate. We compare the behavior of Directors of publicly listed companies who were connected to the future President to the behavior of other non-connected Directors, before and after the election. Consistent with the belief that connections to a powerful politician can protect someone from prosecution or punishment, we uncover indirect evidence that connected Directors are more likely to engage in suspicious insider trading after the election: Purchases by connected Directors trigger larger abnormal returns, connected Directors are less likely to comply with trading disclosure requirements in a timely fashion, and connected Directors trade closer in time to their firms’ announcements of results.
... 20 https://www.thelocal.se/20200310/timeline-how-the-coronavirus-hasdeveloped-in-sweden. 21 Mian et al. (2010), and Tahoun and van Lent (2019) show that politicians consider their private interests when they cast their votes on market intervention policies. 22 This Stringency Index is based on various measures of government responses including containment and closure, economic response, and health systems. ...
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National culture has been shown to impact the way investors, firm managers, and other financial market participants respond to crisis. To date, however, none has looked at the impact of culture on market responses to disasters. This paper is the first to address the effect of national culture on stock market responses to a global health disaster. We find larger declines and greater volatilities for stock markets in countries with lower individualism and higher uncertainty avoidance during the first three weeks after a country’s first COVID-19 case announcement. Our results are robust after controlling for investor fear, cumulative infected cases, the stringency of government response policies, the level of democracy, political corruption, and the 2003 SARS experience, among others.
... Several studies have shown that connected firms indeed have a higher probability of obtaining a bailout. Politicians linked to financial institutions through personal equity holdings are also more likely to vote in favor of the Economic Emergency Stabilization Act, which authorized the U.S. Treasury to spend $700 billion to stabilize financial markets (Tahoun and Van Lent, 2019). Sosyura (2012, 2014) show that while there is no evidence that the decision to apply for the Capital Purchase Program under the Troubled Asset Relief Program in the U.S. was associated with political connectedness, the likelihood of approval was. ...
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A large stream of research has analyzed the effects of corporate political connections (CPCs) on firms, including first evidence on their effects on financial reporting behavior. However, the evidence so far is inconclusive, and attempts to explain the causality of effects on reporting are limited. In this article, we present the results of a systematic review of the literature on CPCs. We draw on findings in the accounting, finance, and economics literature and derive a framework that identifies four channels through which CPCs affect financial reporting. Our review of the literature suggests that effects of political connections tend to be more ambiguous than suggested by individual studies that often offer directional hypotheses. We also identify eight distinct types of political connectedness and discuss their interrelations and the proxies used in the literature to measure them.
... The employment rate is defined as the percentage of the total labor force that is employed in the city where the firm is located. Government intervention is more common in cities with a higher employment rate and thus firms are easier to seek for political connections (Bollinger and Ihlanfeldt 2003;Kondo and Shigeoka 2017;Tahoun and Lent 2017). Therefore, the employment rate variable is positively associated with political connections. ...
Article
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This paper uses Chinese data to examine the link between political connections and pollution discharge by firms. Our empirical results show that political connections are the institutional means by which firms acquire strategic pollution discharge protection. This situation may lead to inadequate enforcement of pollution control regulations. Government officials who are young, of low education, promoted locally, and in office for a relatively long time are more likely to build political connections with polluters. We find that the pollution discharge of politically connected firms also varies considerably due to firm heterogeneity. This study also shows that pollution protection effects caused by political connections are more evident in the Central and Western regions, and capital-intensive industries.
... the benefit depends on prior usage of the accounting categories addressed by the new rules and the magnitude of the unrealized losses, the recognition of which a bank can potentially forgo. Since the literature shows that connections between U.S. representatives and privatesector firms vary within a particular Congress (Kroszner and Stratmann, 1998;Ramanna, 2008;Tahoun, 2014;Tahoun and van Lent, 2019), the magnitude by which a connected bank potentially benefits from fair value relaxation also varies across different members of Congress. ...
Article
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Politicians frequently intervene in the regulation of financial accounting. Evidence from the accounting literature shows that regulatory capture by special interests helps explain these interventions. However, many accounting rules have broad economic or social consequences, such as their effects on income distribution or private sector subsidies. The perception of these consequences varies with a politician's ideology. Therefore, if accounting rules produce those consequences, ideology plausibly spills over and explains a politician's stance on the technical accounting issue, beyond special interest pressure. We use two prominent U.S. political debates about fair value accounting and the expensing of employee stock options to disentangle the role of ideology from special interest pressure. In both debates, ideology explains politicians’ involvement at exactly those points when the debate focuses on the economic consequences of accounting regulation (i.e., bank bailouts and top management compensation). Once the debates focus on more technical issues, connections to special interests remain the dominant force.
... Second, connected firms get more government contracts that are potentially highly lucrative (Boas, Hidalgo, & Richardson, 2014). And third, political connections can provide support in an economic or financial crisis (Acemoglu et al., 2016;Blau, Brough, & Thomas, 2013;Faccio et al., 2006;Goldman, Rocholl, & So, 2013;Tahoun, 2014;Tahoun & Van Lent, 2019). Further, political connections are not only important in corrupt countries. ...
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We study insider trading behavior surrounding the largest bank bailout in history: TARP. In politically‐connected banks, insider buying during the pre‐TARP period is associated with increases in abnormal returns around bank‐specific TARP announcement; for unconnected banks, trading and returns are uncorrelated. Results hold across insiders within the same bank and are stronger for finance‐related government connections. Through a FOIA request we obtained the previously undisclosed TARP funds requested; the ratio of received to requested funds correlates both with abnormal returns and insider buying behavior in connected banks. This is an open access article distributed under the terms of the Creative Commons CC BY license, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited. You are not required to obtain permission to reuse this article.
... Relatedly, Chaney, Faccio, and Parsley (2011) and Leuz and Oberholzer-Gee (2006) show that PCFs, which receive lesser pressure from the financial markets, can afford to be opaque in the quality of their financial reporting. In the same vein, Tahoun and van Lent (2019) suggest that political connections played a significant role in the bailout decisions of the 2008 financial crisis. Indeed, the authors found that government support to financial institutions under the 2008 Emergency Economic Stabilization Act (EESA) was biased by the personal wealth of politicians who owned stocks in these institutions. ...
Article
In this paper, we analyze the effect of political connections on the level and cost of debt of U.S. firms. We identify politically connected firms through manually collecting data on their financial contributions to the two major U.S. political parties, the Democratic Party and the Republican Party, during the 2008 and 2012 U.S. election campaigns. Our main results indicate that during the 2009 to 2015 period, politically connected firms had a significantly higher debt ratio and experienced a lower cost of debt than did unconnected firms. Additional tests show that these results are robust to different model specifications and suggest that politically connected firms benefit from a higher indebtedness level than do unconnected firms and that their political connections give them an advantage that offsets the negative effect of high leverage on their cost of debt.
... Furthermore, Gropp et al. (2011) document that such actions undermine competition in the banking sector, increasing the risk faced by non-assisted banks. Other researchers argue that government interventions are influenced by political interests and that politically connected institutions are more likely than others to receive financial support (Tahoun and van Lent, 2010;Duchin and Sosyura, 2012). As a result, risk to the banking sector increases (Shleifer and Vishny, 1994;Iannota and Sironi, 2007;Berger et al., 2011). ...
Article
Systemic banking crises have placed enormous pressure on national governments to intervene. The empirical literature, however, is inconclusive on what an optimal bailout program should look like to mitigate the negative consequences of government interventions in the banking sector. We find that, in general government interventions have a negative impact on banking sector stability, increasing its risk significantly afterwards. In particular, we find that among bailout measures, nationalization and Asset Management Companies (AMCs) contribute most to the risk effect and that among liquidity support mechanisms, public guarantees are the largest contributor to the risk effect. However we also find that governments by appropriate choice of intervention instruments can mitigate the negative consequences stemming from the above effects.
... (Braun! and! Raddatz,!2010;!Tahoun!and!van!Lent,!2010;!Duchin!and!Sosyura,!2011).!Second,!the!bailout!programs! do! not! address! ...
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The most recent crisis prompted regulatory authorities to implement directives prescribing actions to resolve systemic banking crises. Recent findings show that government intervention results in only a small proportion of bank recoveries. This study examines the reasons for this failure and evaluates the effectiveness of regulatory instruments, demonstrating that weaker banks are more likely to receive government support, that the support extended addresses banks’ specific issues, and that supported banks are more likely to face bankruptcy than non-supported banks. Therefore, government interventions must be sufficiently large, and an optimal banking recovery program must include a deep restructuring process.
... al (2007), corporate bailouts and government intervention (Faccio et. al (2006), Duchin and Sosyura (2009), Tahoun and Van Lent (2010)), and lucrative procurement contracts (Goldman et. al (2008)). ...
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In this paper we demonstrate that legislation has a simple, yet previously undetected impact on firm stock prices. While it is understood that the government and firms have an important relationship, it remains difficult to determine which firms any given piece of legislation will affect, and how it will affect them. By observing the actions of legislators whose constituents are the affected firms, we can gather insights into the likely impact of government legislation on firms. Specifically, focusing attention on “interested” legislators’ behavior captures important information seemingly ignored by the market. A long-short portfolio based on these legislators’ views earns abnormal returns of over 90 basis points per month following the passage of legislation. Further, the more complex the legislation, the more difficulty the market has in assessing the impact of these bills. Consistent with the legislator incentive mechanism, the more concentrated the legislator’s interest in the industry, the more informative are her votes for future returns.
... to put on their boards; rather politicians look out for their own financial interests when making and enforcing legislation (Tahoun and van Lent, 2010). 38 ...
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