Concierge Treatment from Banks: Evidence from the Paycheck Protection Program
41 Pages Posted: 2 Feb 2021 Last revised: 14 Feb 2023
Date Written: October 28, 2021
We use loans that were extended to public firms through the Paycheck Protection Program (PPP) as a laboratory to separate between favoritism and informational advantages in interpersonal ties between banks and firms. Because PPP loans are guaranteed by the government and banks do not need to carefully screen borrowers, this setting reduces information frictions, allowing us to quantify the effect of favoritism. We find that firms with personal ties to banks are more likely to obtain PPP loans. The role of personal ties weakens when firms are less opaque, but does not vary with banks’ corporate governance. We also find that connected firms are more likely to return their loans to avoid regulatory scrutiny. Overall, we offer clean estimates of the role of favoritism in bank lending and highlight the unintended consequence of government programs that use the banking system to allocate capital.
Keywords: COVID-19, credit, Paycheck Protection Program (PPP), agency theory, favoritism, relationship lending
JEL Classification: G21, G28, G32, G38
Suggested Citation: Suggested Citation