Faculty of Economics and Business (room: E0.20). Title: "Lending in social networks" (with F. Risman and D. Pravisini). More information TBA. Doors open from 11.45, lunch will be served.
This paper employs a unique contract-level dataset on members of 211 social clubs in Germany over the period 1993-2011, and uses a quasi-experimental research design to investigate how social connections between banks and firms a ect the allocation of credit. We find that banks provide significantly more credit to firms that are within their club than they do to firms that are members of other clubs. Interestingly, however, the credit supplied inside the club generates a lower return for the bank - banks earn 3.23 percent lower returns on club loans, compared to what they earn on loans given to firms that are members of other clubs. On examining the usage of funds, we find that club firms do not use these extra funds they receive from club banks to make new investments, but instead use these extra funds to pay out dividends. Overall, our results support a favoritism theory rather than a bright side informational or enforcement theory, with state-owned banks engaging most actively in what can be interpreted as `crony' lending.