Why Do Governments Lend? Evidence from the Corporate Loan Market
45 Pages Posted: 16 Feb 2014
Date Written: December 9, 2013
Despite the inefficiencies documented in empirical studies, state ownership of productive assets persists worldwide. One explanation is the “market failure” view, positing that the raison d'être of state-owned firms is to enable projects the private sector is reluctant to sponsor. I analyze a sample of 148,511 corporate loans worth over USD 37 trillion from 156 countries, initiated between 1980 and 2010, to investigate whether lending by state-owned institutions is consistent with the market-failure view. I find that the proportion of loans involving state-owned lenders is higher in countries with weak protection of property rights, in non-common law countries, and during banking crises. Further, the level of state-owned lender involvement (loan arranging and sole lending versus passive loan syndicate membership) escalates in the presence of weak protection of property rights and during banking crises; the share of the loan retained by state-owned lenders increases in the presence of weak protection of property rights. Finally, I find that loans involving state-owned lenders display larger lending syndicates, longer maturities, less frequent collateralization, and lower spreads, with a discount of approximately 21 bps. Evidence of subsidization is stronger in the presence of weak protection of property rights. Overall, my findings are mostly consistent with the market-failure view.
Keywords: State ownership, Syndicated Loans, State-Owned Banks
JEL Classification: G15, G32, G38
Suggested Citation: Suggested Citation