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The Effect of Political Connections on Credit Access: Does the Level of Financial Development Matter?
Author(s) -
Lashitew Addisu A.
Publication year - 2014
Publication title -
kyklos
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.766
H-Index - 58
eISSN - 1467-6435
pISSN - 0023-5962
DOI - 10.1111/kykl.12051
Subject(s) - politics , margin (machine learning) , government (linguistics) , dimension (graph theory) , business , finance , financial system , economics , monetary economics , political science , linguistics , philosophy , mathematics , machine learning , computer science , pure mathematics , law
Summary Although growing evidence indicates that political connections affect firm performance, little is known how institutional factors moderate the process. This paper investigates the effect of political connections on credit access, and the role of financial development in moderating the relationship between the two. The analysis is based on a unique dataset of manufacturing firms that covers dozens of developing and transition countries. The results show that the strength of political connections, measured by the amount of time the firm's senior managers spend with government officials, has a significant positive effect on credit access. Exploiting the cross‐country dimension of the dataset, I then show that the effect of political connections is higher in countries where the banking sector is more concentrated and has higher net interest margin. Furthermore, the effect of political connections is lower in countries that have credit information sharing mechanisms. These results suggest that a competitive banking sector improves efficiency of credit allocation by reducing politically motivated lending.