Related Lending / Rafael La Porta, Florencio Lopez-de-Silane, Guillermo Zamarripa.

By:

Porta, Rafael La

Contributor(s):

Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w8848.Publication details: Cambridge, Mass. National Bureau of Economic Research 2002.Description: 1 online resource: illustrations (black and white)Subject(s):

G3 - Corporate Finance and Governance

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Abstract: In many countries, banks lend to firms controlled by the bank?s owners. We examine the benefits of related lending using a newly assembled dataset for Mexico. Related lending is prevalent (20% of commercial loans) and takes place on better terms than arm?s-length lending (annual interest rates are 4 percentage points lower). Related loans are 33% more likely to default and, when they do, have lower recovery rates (30% less) than unrelated ones. The evidence supports the view that rather than enhance information sharing, related lending is a manifestation of looting.

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w8848 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w8845 Subsidizing the Stork: New Evidence on Tax Incentives and Fertility /	nber w8846 Globalization and Capital Markets /	nber w8847 Imperfect Contract Enforcement /	nber w8848 Related Lending /	nber w8849 Industry Dynamics with Adjustment Costs /	nber w8850 Markups, Gaps, and the Welfare Costs of Business Fluctuations /	nber w8851 Ricardian Equivalence with Incomplete Household Risk Sharing /	Next

March 2002.

In many countries, banks lend to firms controlled by the bank?s owners. We examine the benefits of related lending using a newly assembled dataset for Mexico. Related lending is prevalent (20% of commercial loans) and takes place on better terms than arm?s-length lending (annual interest rates are 4 percentage points lower). Related loans are 33% more likely to default and, when they do, have lower recovery rates (30% less) than unrelated ones. The evidence supports the view that rather than enhance information sharing, related lending is a manifestation of looting.