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Distance Constraints: The Limits of Foreign Lending in Poor Economies

52 Pages Posted: 15 Dec 2004  

Atif R. Mian

Princeton University - Department of Economics; Princeton University - Woodrow Wilson School of Public and International Affairs; NBER

Date Written: August 2004

Abstract

How far can institutional mobility of multi-national banks address the financial development concerns of poor economies? Using a new quarterly panel data set of 80,000 loans over 7 years, I show that greater cultural and geographical distance between a foreign bank's head quarter and the local branches, leads it to further avoid lending to informationally difficult yet fundamentally sound firms requiring relational contracting. Greater distance also makes them less likely to bilaterally renegotiate, and less successful at recovering defaults. Differences in bank size, legal institutions, risk preferences, or unobserved borrower heterogeneity cannot explain these results. The distance constraints identified in this paper can be economically large enough to permanently exclude certain sectors of the economy from financing by foreign banks.

Suggested Citation

Mian, Atif R., Distance Constraints: The Limits of Foreign Lending in Poor Economies (August 2004). Available at SSRN: https://ssrn.com/abstract=631705 or http://dx.doi.org/10.2139/ssrn.631705

Atif R. Mian (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

Princeton University - Woodrow Wilson School of Public and International Affairs ( email )

Princeton University
Princeton, NJ 08544-1021
United States

NBER

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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