Corruption in bank lending to firms: Cross-country micro evidence on the beneficial role of competition and information sharing

To link to full-text access for this article, visit this link: http://dx.doi.org/10.1016/j.jfineco.2008.04.003 Byline: James R. Barth (a), Chen Lin (b), Ping Lin (c), Frank M. Song (d) Keywords: Competition; Information sharing; Bank lending; Corruption Abstract: Building on the important study by Beck, Demirguc-Kunt, and Levine [2006. Bank supervision and corruption in lending. Journal of Monetary Economics 53, 2131-2163], we examine the effects of both borrower and lender competition as well as information sharing via credit bureaus/registries on corruption in bank lending. Using the unique World Bank data set (WBES) covering more than 4,000 firms across 56 countries with information on credit bureaus/registries, assembled by Djankov, McLiesh, and Shleifer [2007. Private credit in 129 countries. Journal of Financial Economics 84, 299-329], and bank regulation data collected by Barth, Caprio, and Levine [2006. Rethinking Bank Regulation: Till Angels Govern. Cambridge University Press, New York] to measure bank competition and information sharing, we find strong evidence that both banking competition and information sharing reduce lending corruption, and that information sharing also helps enhance the positive effect of competition in curtailing lending corruption. We also find that the ownership structure of firms and banks, legal environment, and firm competition all exert significant impacts on lending corruption. Author Affiliation: (a) Department of Finance, Auburn University and Milken Institute, USA (b) Department of Economics and Finance, City University of Hong Kong, Hong Kong (c) Department of Economics, Lingnan University, Hong Kong (d) School of Economics and Finance, University of Hong Kong, Hong Kong Article History: Received 8 November 2007; Revised 18 March 2008; Accepted 1 April 2008 Article Note: (footnote) [star] We thank the editor, William Schwert, an anonymous referee, Paul Evans, Belton Fleisher, Edward Green, Ross Levine, Thomas Ross, Wing Suen, Cheng Wang, Yijiang Wang, Keith Wong, Colin Xu, Ruilin Zhou, and participants in the Fourth Summer Workshop on Industrial Organization and Management Strategy at Shanghai University of Finance and Economics and the Economics and Finance Workshop at The University of Hong Kong for helpful comments and suggestions. Frank Song thanks Guanghua School of Management, Peking University for support during his sabbatical leave.