Latent Related Parties in Groups and Connected Lending: Evidence from Listed Companies in Iran

27 Pages Posted: 31 Oct 2023 Last revised: 14 Apr 2024

See all articles by Amineh Mahmoudzadeh

Amineh Mahmoudzadeh

Sharif University of Technology

Reza Ghasemipour

Sharif University of Technology - Graduate School of Management and Economics

Seyed Ali Madanizadeh

Sharif University of Technology

Date Written: September 29, 2023

Abstract

Various group affiliations influence the establishment of connected lending. Within a business group, a bank can connect with firms either vertically or horizontally, through a direct chain or a parent holding company, respectively. Considering the impact of ownership structure on information asymmetry, risk allocation, and returns distribution between banks and connected firms, we anticipate that group affiliation shapes lending behavior. To empirically investigate this hypothesis, we analyze a manually collected dataset of listed companies in Iran. To identify the impact of ownership relationship on loan supply, we innovatively controlled for the firm-specific credit demand shocks using the Bartik method. We find that both kinds of linkages increase the loan supply likelihood, however, only vertical linkages lead to an increase in loan size. Establishing vertical connections lead to a 2 percentage points increase in loan supply likelihood and an impressive 0.013 boost in the loan to sale ratio (114% of the average). In contrast, establishing horizontal connections shows a 1.5 percentage point increase in loan supply probability, with no discernible effect on loan size. Hence, the phenomenon of tunneling between connected banks and firms appears to be more pronounced in the vertical format. These results highlight that, despite meeting regulatory thresholds for related party transactions, banks remain substantially exposed to individual entities. Regulatory frameworks should therefore consider diverse ownership structures to delineate related parties and mitigate risks associated with connected lending.

Keywords: Connected lending, Group affiliation, Tunneling, Vertical/Horizontal ownership relation

JEL Classification: E44, G21, G32

Suggested Citation

Mahmoudzadeh, Amineh and Ghasemipour, Reza and Madanizadeh, Seyed Ali, Latent Related Parties in Groups and Connected Lending: Evidence from Listed Companies in Iran (September 29, 2023). Available at SSRN: https://ssrn.com/abstract=4589320 or http://dx.doi.org/10.2139/ssrn.4589320

Amineh Mahmoudzadeh (Contact Author)

Sharif University of Technology ( email )

Tehran
Iran
+98 (21) 66165865 (Phone)
+98 (21) 66022759 (Fax)

HOME PAGE: http://gsme.sharif.edu/~mahmoodzadeh/

Reza Ghasemipour

Sharif University of Technology - Graduate School of Management and Economics ( email )

Tehran
Iran

Seyed Ali Madanizadeh

Sharif University of Technology ( email )

Tehran
Iran

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