The impact of corruption on firms’ access to bank loans: evidence from China

Abstract

Current theories cannot explain the coexistence of China’s 40 years of rapid economic growth and its imperfect financial system, insufficient investor protection, and government intervention. This study empirically tests hypotheses regarding the effects of corruption on firms’ access to bank loans using econometric models based on survey data of 2,848 enterprises in China collected by the World Bank. The results show an inverted U-shaped relationship between corruption and firms’ access to bank loans: a low level of corruption increases firms’ access to bank loans, whereas a high level of corruption hinders firms from obtaining bank loans. Mild corruption may be a suboptimal choice for firms seeking bank loans, and bank funds allocation based on corruption can achieve Pareto optimality among firms. Moreover, government guarantees are conducive to firms’ access to financing and the link between corruption and firms’ access to bank loans can be explained by the role of government guarantees. The improvement of institutional quality is positively associated with firms’ access to bank loans and weakens the effects of corruption on firms’ external financing. This study thus sheds light on the real effects of corruption and the determinants of firms’ access to bank loans in developing countries.