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Politically connected lending, government capital injection, and bank performance

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  • Jou, Rosemary
  • Chen, Shi
  • Tsai, Jeng-Yan

Abstract

This paper takes a contingent claim approach to evaluate the equity and risk of a bank. The paper investigates how government capital injection affects the bank's lending and equity risk, and how these effects vary across remaining privately owned and becoming government-owned. In particular, we argue that the strength of government ownership is useful in disciplining management of preferential access to debt financing for politically connected borrowing firms. It is shown that government capital injection leads to superior performance and greater safety for the bank remaining privately owned. The advantage of large capital is likely to be more pronounced to equity return, but less to safety for the government-owned bank. Moreover, political connection reinforces the increased return performance and safety. Government capital injection as such makes the bank less prone to risk-taking, thereby affecting the stability of the banking system.

Suggested Citation

  • Jou, Rosemary & Chen, Shi & Tsai, Jeng-Yan, 2017. "Politically connected lending, government capital injection, and bank performance," International Review of Economics & Finance, Elsevier, vol. 47(C), pages 220-232.
  • Handle: RePEc:eee:reveco:v:47:y:2017:i:c:p:220-232
    DOI: 10.1016/j.iref.2016.10.011
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    References listed on IDEAS

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    Keywords

    Government capital injection; Ownership structure; Political connection; Barrier option;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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