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Bank Credit and Business Networks


Asim Ijaz Khwaja


Harvard University - Harvard Kennedy School (HKS)

Atif R. Mian


Princeton University - Department of Economics; Princeton University - Woodrow Wilson School of Public and International Affairs; NBER

Abid Qamar


State Bank of Pakistan

February 17, 2011

HKS Working Paper No. RWP11-017

Abstract:     
We construct the topology of business networks across the population of firms in an emerging economy, Pakistan, and estimate the value that membership in large yet diffuse networks brings in terms of access to bank credit and improving financial viability. We link two firms if they have a common director. The resulting topology includes a "giant network" that is order of magnitudes larger than the second largest network. While it displays "small world" properties and comprises 5 percent of all firms, it accesses two-thirds of all bank credit. We estimate the value of joining this giant network by exploiting "incidental" entry and exit of firms over time. Membership increases total external financing by 16.6 percent, reduces the propensity to enter financial distress by 9.5 percent, and better insures firms against industry and location shocks. Firms that join improve financial access by borrowing more from new lenders, particularly those already lending to their (new) giant-network neighbors. Network benefits also depend critically on where a firm connects to in the network and on the firm's pre-existing strength.

Number of Pages in PDF File: 53

Keywords: Business Networks, Financial Development, Bank Credit, Network Analysis

JEL Classification: L14, O16, D85, D02

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Date posted: February 19, 2011 ; Last revised: March 15, 2011

Suggested Citation

Khwaja, Asim Ijaz and Mian, Atif R. and Qamar, Abid, Bank Credit and Business Networks (February 17, 2011). HKS Working Paper No. RWP11-017. Available at SSRN: http://ssrn.com/abstract=1763351 or http://dx.doi.org/10.2139/ssrn.1763351

Contact Information

Asim Ijaz Khwaja (Contact Author)
Harvard University - Harvard Kennedy School (HKS) ( email )
79 John F. Kennedy Street
Cambridge, MA 02138
United States
617-384-7790 (Phone)
617-496-5960 (Fax)
Atif R. Mian
Princeton University - Department of Economics ( email )
Princeton, NJ 08544-1021
United States
Princeton University - Woodrow Wilson School of Public and International Affairs ( email )
Princeton University
Princeton, NJ 08544-1021
United States
NBER
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Abid Qamar
State Bank of Pakistan ( email )
I.I.CHUNDRIGAR ROAD
I.I. Chundrigar Road
KARACHI
Pakistan
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