Political connections, family ownership and access to bank credit

Abstract

This study investigates how firm-level political connections (PCs) play a role in their access to bank credit. We decompose the bank loan application process into the self-selection process of firms and the selection process of banks. Using 17,249 firms from 2018 to 2020, World Bank Enterprise surveys, we find that PCs are positively associated with the willingness of firms to apply for bank credit, the probability of credit approval, and favourable credit terms. Moreover, being a family firm raises the probability of securing credit approval by 21% and, when the firm is politically connected, the probability of obtaining secure loans without collateral is 11% greater than firms without political connections. In line with institutional theory, we argue that PCs promote efficiency by allowing private sector agents to circumvent cumbersome regulations in developing and transitional economies.