Distance Constraints: The Limits of Foreign Lending in Poor Economies

Abstract:     
How far can institutional mobility of multi-national banks address the financial development concerns of poor economies? Using a new quarterly panel data set of 80,000 loans over 7 years, I show that greater cultural and geographical distance between a foreign bank's head quarter and the local branches, leads it to further avoid lending to informationally difficult yet fundamentally sound firms requiring relational contracting. Greater distance also makes them less likely to bilaterally renegotiate, and less successful at recovering defaults. Differences in bank size, legal institutions, risk preferences, or unobserved borrower heterogeneity cannot explain these results. The distance constraints identified in this paper can be economically large enough to permanently exclude certain sectors of the economy from financing by foreign banks.

Number of Pages in PDF File: 52

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