Working Paper: CEPR ID: DP5151
Authors: Mariassunta Giannetti; Steven Ongena
Abstract: An extensive empirical literature has documented the positive growth effects of equity market liberalization. However, this line of research ignores the impact of financial integration on a category of firms crucial for economic development, i.e. the small entrepreneurial firms. This paper aims to fill this void. We employ a large panel containing almost 60,000 firm?year observations on listed and unlisted companies in Eastern European economies to assess the differential impact of foreign bank lending on firm growth and financing. Foreign lending stimulates growth in firm sales, assets, and leverage, but the effect is dampened for small firms. We also find that the most connected businesses benefit least from foreign bank entry. This finding suggests that foreign banks can help mitigate connected lending problems and improve capital allocation.
Keywords: Competition; Emerging Markets; Foreign Bank Lending; Lending Relationships
JEL Codes: G21; L11; L14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| foreign bank lending (F34) | growth in firm sales (L25) |
| foreign bank lending (F34) | growth in firm assets (D25) |
| foreign bank lending (F34) | growth in firm leverage (G32) |
| foreign bank lending (F34) | smaller firms' growth (L25) |
| foreign bank presence (F65) | connected lending problems mitigation (F65) |
| foreign bank presence (F65) | fewer loans to firms connected to local elites (F65) |
| foreign bank lending (F34) | younger firms' growth (L26) |
| foreign bank lending (F34) | older firms' growth (L25) |