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Collectivism and Corruption in Commercial Loan Production: How to Break the Curse?

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Abstract

Recent research suggests that collectivism breeds corruption in bank lending. This finding, together with the stickiness of culture, poses a direct challenge to economic growth in collectivist societies. In this paper, we address this grim outlook by examining the types of firms that are susceptible to the detrimental effect of collectivism on lending integrity and the formal institutions that can help alleviate such effect. We find that the adverse effect of collectivism on bank corruption is more severe in small and medium-sized firms, privately owned firms, and non-exporting firms, while it is considerably weaker in countries with more effective private monitoring, a higher (lower) fraction of foreign-owned (government-owned) banks, a more competitive banking sector, better information sharing, and stronger legal and political institutions. Our findings are robust to using alternative measures of collectivism and alternative dependent variables. These results highlight how firm-level characteristics and formal institutions interact with collectivism in affecting firms’ access to bank credit.

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Notes

  1. The cross-cultural psychology literature emphasizes the importance of the individualism/collectivism syndrome. Triandis (2001) further argues that individualism/collectivism is the most significant driver of differences across countries. This cultural dimension relates to the fundamental view of the self as independent vs. interdependent, which affects an individual’s cognition, emotion, motivation, and ultimately behavior (Hofstede 2001; Markus and Kitayama 1991). Greenfield (2000) concludes that the individualism/collectivism framework captures “deep principles” of cultural interpretation that influence an individual’s own behaviors as well as their interpretation of others’ behaviors.

  2. For instance, country-level case studies on Russia (Laeven 2001), Mexico (La Porta et al. 2003), and Thailand (Charumilind et al. 2006) show that borrowers “connected” to their lending banks enjoy priority access to bank credit and preferential loan terms.

  3. Millington et al. (2005) suggest that gift-giving appears to be related to illicit payments, corruption, and the pursuit of self-interest.

  4. As discussed earlier, in bank lending, soft information is based on the loan officer’s personal assessment of firm quality. This information, which includes the officer’s evaluation of the firm’s competitive position and managerial team, cannot be easily verified by anyone other than the loan officer who produces it. In contrast, hard information, which includes the value of collateral, taxable income, and other accounting data from financial statements, is relatively easy to verify (e.g., Stein 2002).

  5. WBES groups firms into three size categories. Firms with 5–50 employees are classified as small, firms with 51–500 employees are classified as medium-sized, and firms with more than 500 employees are classified as large.

  6. For instance, data compiled by Ayyagari et al. (2007) for 76 countries indicate that, on average, SMEs account for 54 % of manufacturing employment.

  7. If a firm has both government and foreign ownership, we classify the firm as government-owned.

  8. Definitions of the ICRG variables are available at http://www.prsgroup.com/wp-content/uploads/2012/11/icrgmethodology.pdf.

  9. Haber et al. (2007) present an extreme example of collusion between banking and politics in Mexico under the dictatorship of Porfirio Díaz.

  10. We are unable to simultaneously control for Supervisory Power, Private Monitoring Index, Bank Concentration, Private Bureau Age, and State Ownership in Media while conducting split-sample tests, because doing so would reduce the sample to 2,760 observations, and some of these variables have limited variation that would drop out of the regressions in certain subsamples.

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Acknowledgments

We would like to thank four anonymous reviewers, Najah Attig, Allen Berger, Narjess Boubakri, Thomas Clarke (Editor), Walid Saffar, Andy Spicer, and participants at the 2014 Academy of International Business meeting (Vancouver, Canada) for their constructive comments. We acknowledge financial support from Canada’s Social Sciences and Humanities Research Council (SSHRC).

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Authors and Affiliations

  1. University of Alberta, Edmonton, AB, T6C 4G9, Canada

    Sadok El Ghoul

  2. University of South Carolina, Columbia, SC, 29208, USA

    Omrane Guedhami & Chuck C. Y. Kwok

  3. Nottingham University Business School China, Ningbo, 315100, China

    Xiaolan Zheng

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  1. Sadok El Ghoul
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  2. Omrane Guedhami
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Correspondence to Omrane Guedhami.

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Table 5 Variable definitions and data sources
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El Ghoul, S., Guedhami, O., Kwok, C.C.Y. et al. Collectivism and Corruption in Commercial Loan Production: How to Break the Curse?. J Bus Ethics 139, 225–250 (2016). https://doi.org/10.1007/s10551-015-2551-2

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