Lending Corruption and Bank Loan Contracting: Cross-Country Evidence

59 Pages Posted: 3 Dec 2018

See all articles by Liangliang Jiang

Liangliang Jiang

Hong Kong Polytechnic University

Jeffrey Ng

Hong Kong Polytechnic University - School of Accounting and Finance

Chong Wang

The Hong Kong Polytechnic University

Date Written: November 29, 2018

Abstract

Lending corruption is an important agency problem for banks. Using data from the World Bank Business Environmental Survey, we find that in countries with more lending corruption, banks give more favorable loan terms to borrowers. This relation is stronger when firms are under more financing constraints, consistent with corruption being important to obtaining favorable loan terms when the supply of debt capital is tighter. In line with the expectation that monitoring constrains agency problems, this relation is weaker in countries with higher foreign ownership of banks or where Protestantism is the primary religion. In the syndicated loan market, participant banks are inclined to lend less in countries where lending corruption is more prevalent. Firms in countries with greater corruption prefer private bank debt over public bonds and are more leveraged. Banks in countries with more lending corruption have poor loan quality, worse earnings performance, and are more susceptible to trouble during a financial crisis. Overall, our findings suggest that corruption greases the wheels for borrowers but is detrimental to bank shareholders.

Keywords: Lending Corruption; Bank Loan Contracting; Loan Quality; Financial Crisis

JEL Classification: K4; G21; G28

Suggested Citation

Jiang, Liangliang and Ng, Jeffrey and Wang, Chong, Lending Corruption and Bank Loan Contracting: Cross-Country Evidence (November 29, 2018). Available at SSRN: https://ssrn.com/abstract=3292740 or http://dx.doi.org/10.2139/ssrn.3292740

Liangliang Jiang (Contact Author)

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

Jeffrey Ng

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

Hung Hom
Kowloon
Hong Kong

Chong Wang

The Hong Kong Polytechnic University ( email )

Hong Kong
Hong Kong

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