Local Public Corruption and Bank Lending Activity in the United States

62 Pages Posted: 23 Jul 2019

See all articles by Theodora Bermpei

Theodora Bermpei

University of Sussex - School of Business, Management and Economics

Antonios Nikolaos Kalyvas

Department of Banking and Finance, Southampton Business School, University of Southampton

Leone Leonida

King's College London - King's Business School

Date Written: July 12, 2019

Abstract

Using a conviction-based measure, we find that local (state-level) public corruption exerts a negative effect on the lending activity of US banks. Our baseline estimations show that the difference in public corruption between, e.g., Alabama, where corruption is high, and Minnesota, where corruption is low, implies that banks headquartered in the former state grant 0.56% less credit (or $3.57 million for the average bank) ceteris paribus. Using proxies for relationship lending and monitoring, we also find that these bank characteristics weaken the negative effect of public corruption on lending. In further analysis, we show that these effects are more evident for smaller banks and banks operating in a single state. These results are robust to tests that address endogeneity, to the use of perception-based measures of corruption and after controlling for credit demand conditions. These findings provide evidence that public corruption could facilitate information asymmetry in the lending market and, thus, could hinder local development by reducing bank credit.

Keywords: bank lending; public corruption; information asymmetry

JEL Classification: G21, D73

Suggested Citation

Bermpei, Theodora and Kalyvas, Antonios Nikolaos and Leonida, Leone, Local Public Corruption and Bank Lending Activity in the United States (July 12, 2019). Available at SSRN: https://ssrn.com/abstract=3423450 or http://dx.doi.org/10.2139/ssrn.3423450

Theodora Bermpei (Contact Author)

University of Sussex - School of Business, Management and Economics ( email )

Falmer, Brighton BN1 9SL
United Kingdom

Antonios Nikolaos Kalyvas

Department of Banking and Finance, Southampton Business School, University of Southampton ( email )

Southampton, SO17 1BJ
United Kingdom

Leone Leonida

King's College London - King's Business School ( email )

150 Stamford Street
London, SE1 9NH
United Kingdom

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