Bank connection, corruption and collateral in China

Using a sample of China's listed entrepreneurial firms, we investigate the relationship between bank connection, corruption and collateral requirements. We find that when a firm is connected with banks, collateral requirements are significantly lower. We also find that bank connection is the channel through which corruption is exercised to benefit those firms with favoured loan terms. Our analysis further reveals that bank connection and corruption have jointly improved bank lending efficiency. However, these positive effects become weaker with government intervention in the form of an economic stimulus package. We argue that in an emerging market, bank connection facilitates rent seeking and helps entrepreneurial firms to access bank loans with favoured loan terms, and this relationship-based financing relies on corruption. Overall, our results are consistent with the view that in an emerging market non-state sector growth is supported by relationship-based external financing and unconventional governance methods.