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Local public corruption and bank lending activity in the United States

Local public corruption and bank lending activity in the United States
Local public corruption and bank lending activity in the United States
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, for example, Alabama, where corruption is high, and Minnesota, where corruption is low, implies that banks headquartered in the former state grant 0.55% less credit (or $3.52 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. 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. In further analysis, we show that these effects are more evident for smaller banks and banks operating in a single state. 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.
Bank lending, Information asymmetry, Public corruption
0167-4544
73-98
Bermpei, Theodora
9549be8f-7acb-4f52-a237-3a093b9bb584
Kalyvas, Antonios Nikolaos
b90c20b2-9fd4-4d5d-a123-34a193e1ca1d
Leonida, Leone
f5081b55-1867-43e4-bfc0-e18aaba2df85
Bermpei, Theodora
9549be8f-7acb-4f52-a237-3a093b9bb584
Kalyvas, Antonios Nikolaos
b90c20b2-9fd4-4d5d-a123-34a193e1ca1d
Leonida, Leone
f5081b55-1867-43e4-bfc0-e18aaba2df85

Bermpei, Theodora, Kalyvas, Antonios Nikolaos and Leonida, Leone (2021) Local public corruption and bank lending activity in the United States. Journal of Business Ethics, 171 (1), 73-98. (doi:10.1007/s10551-019-04410-6).

Record type: Article

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, for example, Alabama, where corruption is high, and Minnesota, where corruption is low, implies that banks headquartered in the former state grant 0.55% less credit (or $3.52 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. 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. In further analysis, we show that these effects are more evident for smaller banks and banks operating in a single state. 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.

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e-pub ahead of print date: 3 January 2020
Published date: 1 June 2021
Additional Information: Publisher Copyright: © 2020, The Author(s).
Keywords: Bank lending, Information asymmetry, Public corruption

Identifiers

Local EPrints ID: 437107
URI: http://eprints.soton.ac.uk/id/eprint/437107
ISSN: 0167-4544
PURE UUID: 5eed9e45-cf3b-4109-9715-29fec65cc0e5
ORCID for Antonios Nikolaos Kalyvas: ORCID iD orcid.org/0000-0003-4416-7032

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Date deposited: 17 Jan 2020 17:32
Last modified: 03 Sep 2022 04:10

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Contributors

Author: Theodora Bermpei
Author: Leone Leonida

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