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The Effect of Political Connections on Credit Access: Does the Level of Financial Development Matter?

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  • Addisu A. Lashitew

Abstract

type="main"> 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.

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  • Addisu A. Lashitew, 2014. "The Effect of Political Connections on Credit Access: Does the Level of Financial Development Matter?," Kyklos, Wiley Blackwell, vol. 67(2), pages 227-254, May.
    • Handle: RePEc:bla:kyklos:v:67:y:2014:i:2:p:227-254
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    File URL: http://hdl.handle.net/10.1111/kykl.12051
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    Cited by:

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    2. Saibal Ghosh, 2022. "Financing obstacles for SMEs: the role of politics," Journal of Global Entrepreneurship Research, Springer;UNESCO Chair in Entrepreneurship, vol. 12(1), pages 329-340, December.
    3. Scharfenkamp, Katrin, 2018. "The effects of bridging business and politics – A survival analysis of German Federal ministers," European Journal of Political Economy, Elsevier, vol. 55(C), pages 433-454.
    4. Le Phuong Xuan Dang & Viet-Ngu Hoang & Son Hong Nghiem & Clevo Wilson, 2023. "Social capital and informal credit access: empirical evidence from a Vietnamese household panel survey," Empirical Economics, Springer, vol. 65(1), pages 311-340, July.
    5. Lashitew, Addisu A., 2017. "The Uneven Effect of Financial Constraints: Size, Public Ownership, and Firm Investment in Ethiopia," World Development, Elsevier, vol. 97(C), pages 178-198.
    6. Zunaira Aman & Brigitte Granville & Sushanta K. Mallick & Ilayda Nemlioglu, 2024. "Does greater financial openness promote external competitiveness in emerging markets? The role of institutional quality," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 29(1), pages 486-510, January.
    7. Zhi Wang & Miao Yu, 2022. "Political embeddedness and firms' growth," Kyklos, Wiley Blackwell, vol. 75(1), pages 127-153, February.

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