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Local Public Corruption and Bank Lending Activity in the United States

Research output: Contribution to journalArticle

Theodora Bermpei, Antonios Nikolaos Kalyvas, Leone Leonida

Original languageEnglish
Number of pages26
JournalJOURNAL OF BUSINESS ETHICS
Early online date3 Jan 2020
DOIs
Publication statusE-pub ahead of print - 3 Jan 2020

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Abstract

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.

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