Does Money Buy Credit?
Firm-Level Evidence on Bribery and Bank Debt
Zuzana Fungáčová
Bank of Finland
Anna Kochanova
Max Planck Institute for Research on Collective Goods
Laurent Weill
EM Strasbourg Business School, University of Strasbourg,
Bank of Finland
Corruption is a major concern in emerging and developing countries as it influences
growth, productivity, and foreign direct investment (Mauro, 1995; Wei, 2000; Méon and
Weill, 2010). Since bank credit has been shown to be a driving force for growth (e.g. Levine,
Loayza and Beck, 2005), the further question is whether corruption affects economic
development through the micro channel of bank credit provided to firms.
Literature suggests ambiguous effects of corruption on bank credit. In line with the law
and finance theory pioneered by La Porta et al. (1997), corruption is expected to reduce bank
credit. A large amount of empirical research supports the finding that poor law enforcement
reduces bank credit (Bae and Goyal, 201; Weill, 2011).
However the impact of corruption on firms’ bank credit is not limited to judicial
corruption. It can also take place during lending process through bribes given to bank
officials to obtain a loan, as observed by Beck, Demirgüc-Kunt and Levine (2006).
Corruption in lending can contribute to reduction in firms’ bank debt due to the increasing
cost of the loan for the borrower. Bribe in this case acts as a tax on borrowers and constitutes
an obstacle to credit. Nevertheless, it can also contribute to increase in firms’ bank debt if the
borrower takes the initiative to propose a bribe to bank officials to enhance his chances to
obtain a loan. Weill (2011) employs bank-level data from all around the world to show that
corruption can enhance bank lending when levels of bank risk aversion, associated with
greater reluctance of banks to grant loans, are particularly high. Chen, Liu and Su (2013) find
evidence in favor of such positive impact of corruption on access to bank credit in China as
they observe a positive link between a proxy measuring the amount of bribes provided by the
firm and the importance of firms’ bank credit.
Surprisingly this single-country study is the only work to our knowledge which
investigates the effect of corruption on bank credit at the firm level. Hence the literature does
not provide firm-level evidence to clarify the relation between bribery and bank credit. Our
investigation aims to fill this loophole by analyzing the effect of bribery on firms’ ratios of
bank debt in transition countries. We examine how bribery influences bank debt ratios for a
large sample of firms from 14 transition countries including formerly communist countries of
Central and Eastern Europe, but also Russia and Ukraine.
A major concern when analyzing the impact of bribery on bank debt ratios is to have
firm-level information on both the balance sheet items and on bribery practice. As corruption
is a hidden phenomenon by nature, information on bribery is generally collected on an
anonymous basis to guarantee better quality of responses. Therefore it is difficult to link
corruption with accounting information.
To solve this issue we combine firm-level accounting data from the Amadeus database
with firm-level data on bribery practices from the BEEPS (Business Environment and
Enterprise Performance Survey) database.1 Relying on the latter database, we measure
bribery with the frequency of making extra unofficial payments to officials to get things
done. We cannot directly match firms from both databases as information from the BEEPS
database is anonymous. Therefore we proceed by computing the mean of the bribery measure
for each cell defined at the intersection of five characteristics: country, survey wave of the
BEEPS (three waves for 1999-2001, 2002-2004, 2005-2007), industry (2-digit ISIC code),
firm size (micro, small, medium and large firms), and location size (capital, city with
population over 1 million, and others). We then assign this bribery measure to each firm-level
observation from Amadeus database belonging to the same cell.
We contribute to the literature in four important respects. First, we provide the first
cross-country analysis concerning the impact of bribery on firms’ bank debt that uses microlevel data. We hence contribute to the understanding of the institutional factors that influence
the level of firms’ bank indebtedness. While many works analyze the effect of institutional
determinants on financial structure (e.g. Fan, Titman and Twite, 2012), they all use countrylevel variables which suffer from aggregation when linking them to firm-level financial
variables.
Second, we contribute to the literature on the effects of corruption in transition
countries. A large set of studies confirms the persistence and the economic consequences of
1
Kochanova (2012) adopts the same approach in her work on the impact of bribery on firm performance in
transition countries.
corruption in these countries even if cross-country differences can be observed. In her study
dealing with the determinants of capital structure in transition countries, Jõeveer (2013)
examines the impact of corruption on debt ratios. However our analysis goes one step farther
as we employ a disaggregated measure of bribery, consider a broader sample of countries
including Russia and Ukraine, and use more recent data
Third, we examine if bribery affects differently firms’ bank debt depending on its
maturity. When bank credit is analyzed as a whole, the differences between short-term and
long-term bank credit are not taken into account even if they are of importance.
Fourth, we investigate the potential effect of bribery by looking at the interaction with
the institutional factors of the banking industry. Financial development can influence the
impact of bribery on firms’ bank debt, by easing or tightening such indebtedness. Moreover,
ownership of banks can influence this relation as corruption in lending might be more or less
prevalent depending on bank ownership.
Our analysis yields several interesting results. We find that bribery contributes to
increase in firms’ bank debt ratio. We interpret this finding so that bribery encourages firms’
bank lending through bribes given to bank officials. Nevertheless, the effects of bribery on
firms’ bank debt ratios differ with the maturity of debt. While bribery contributes to increase
in short-term bank debt, it hampers long-term bank debt. The latter result can be explained by
the fact that banks are more reluctant to grant long-term loans in presence of very corrupt
environment. Long-term bank loans are less common and more monitored inside banks than
short-term bank loans. The decision to provide such loans can hence be more influenced by
the institutional framework through the protection of creditors and the enforcement of loan
contracts.
Finally, we find that the institutional factors of the banking industry influence the
relation between bribery and firms’ bank debt ratio. Greater financial development reduces
the positive effect of bribery, while higher market share of state-owned banks has the
opposite effect. Foreign bank presence also affects the impact of bribery even if this effect
depends on firms’ bank debt maturity.