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Local Public Corruption and Bank Lending Activity in the United States

Bermpei, Theodora and Kalyvas, Antonios Nikolaos and Leonida, Leone (2021) 'Local Public Corruption and Bank Lending Activity in the United States.' Journal of Business Ethics, 171 (1). pp. 73-98. ISSN 0167-4544

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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.

Item Type: Article
Uncontrolled Keywords: Bank lending; Public corruption; Information asymmetry
Divisions: Faculty of Social Sciences
Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
SWORD Depositor: Elements
Depositing User: Elements
Date Deposited: 07 Jan 2020 13:41
Last Modified: 06 Jan 2022 14:08

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