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Democracy and Credit “Democracy Doesn`t Come Cheap” But At Least Credit to Its Corporations Will Be

Author

Listed:
  • Manthos D. DELIS

    (University of Surrey)

  • Iftekhar HASAN

    (Fordham University and Bank of Finland)

  • Steven ONGENA

    (University of Zurich, Swiss Finance Institute, KU Leuven, and CEPR)

Abstract

Does democratization reduce the cost of credit? Using global syndicated loan data from 1984 to 2014, we show that democratization has a sizeable negative effect on loan spreads: a one point increase in the zero-to-ten Polity IV index of democracy shaves on average 21 basis points off spreads. Reversals to autocracy hike spreads more strongly. Our results are robust to the comprehensive inclusion of relevant controls, to the instrumentation with regional waves of democratization, and to a battery of sensitivity tests. We thus highlight the lower cost of loans as one relevant mechanism through which democratization may affect economic development.

Suggested Citation

  • Manthos D. DELIS & Iftekhar HASAN & Steven ONGENA, 2017. "Democracy and Credit “Democracy Doesn`t Come Cheap” But At Least Credit to Its Corporations Will Be," Swiss Finance Institute Research Paper Series 17-14, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1714
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    Cited by:

    1. Frigerio, Marco & Vandone, Daniela, 2020. "European development banks and the political cycle," European Journal of Political Economy, Elsevier, vol. 62(C).
    2. Delis, Manthos & Politsidis, Panagiotis & Sarno, Lucio, 2018. "Foreign currency lending," MPRA Paper 88197, University Library of Munich, Germany.

    More about this item

    Keywords

    Loan pricing; Loan spreads; Democratic institutions; Reversals;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • P16 - Political Economy and Comparative Economic Systems - - Capitalist Economies - - - Capitalist Institutions; Welfare State
    • P26 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Property Rights
    • P27 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Performance and Prospects
    • P47 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - Performance and Prospects

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