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Bank Credit and Business Networks

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  • Khwaja, Asim Ijaz

    (Harvard University)

  • Mian, Atif

    (University of California, Berkeley)

  • Qamar, Abid

    (State Bank of Pakistan)

Abstract

We construct the topology of business networks across the population of firms in an emerging economy, Pakistan, and estimate the value that membership in large yet diffuse networks brings in terms of access to bank credit and improving financial viability. We link two firms if they have a common director. The resulting topology includes a "giant network" that is order of magnitudes larger than the second largest network. While it displays "small world" properties and comprises 5 percent of all firms, it accesses two-thirds of all bank credit. We estimate the value of joining this giant network by exploiting "incidental" entry and exit of firms over time. Membership increases total external financing by 16.6 percent, reduces the propensity to enter financial distress by 9.5 percent, and better insures firms against industry and location shocks. Firms that join improve financial access by borrowing more from new lenders, particularly those already lending to their (new) giant-network neighbors. Network benefits also depend critically on where a firm connects to in the network and on the firm's pre-existing strength.

Suggested Citation

  • Khwaja, Asim Ijaz & Mian, Atif & Qamar, Abid, 2011. "Bank Credit and Business Networks," Working Paper Series rwp11-017, Harvard University, John F. Kennedy School of Government.
  • Handle: RePEc:ecl:harjfk:rwp11-017
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    References listed on IDEAS

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    1. John McMillan & Christopher Woodruff, 1999. "Interfirm Relationships and Informal Credit in Vietnam," The Quarterly Journal of Economics, Oxford University Press, pages 1285-1320.
    2. Yael V. Hochberg & Alexander Ljungqvist & Yang Lu, 2007. "Whom You Know Matters: Venture Capital Networks and Investment Performance," Journal of Finance, American Finance Association, vol. 62(1), pages 251-301, February.
    3. Dean Karlan & Markus Mobius & Tanya Rosenblat & Adam Szeidl, 2009. "Trust and Social Collateral," The Quarterly Journal of Economics, Oxford University Press, pages 1307-1361.
    4. Matthew O. Jackson & Brian W. Rogers, 2005. "The Economics of Small Worlds," Journal of the European Economic Association, MIT Press, vol. 3(2-3), pages 617-627, 04/05.
    5. Lauren Cohen & Andrea Frazzini & Christopher Malloy, 2008. "The Small World of Investing: Board Connections and Mutual Fund Returns," Journal of Political Economy, University of Chicago Press, vol. 116(5), pages 951-979, October.
    6. Jackson, Matthew O. & Calvo, Antoni, 2002. "Social Networks in Determing Employment and Wages: Patterns, Dynamics, and Inequality," Working Papers 1149, California Institute of Technology, Division of the Humanities and Social Sciences.
    7. repec:ucp:bkecon:9780226531083 is not listed on IDEAS
    8. Marianne Bertrand & Paras Mehta & Sendhil Mullainathan, 2002. "Ferreting out Tunneling: An Application to Indian Business Groups," The Quarterly Journal of Economics, Oxford University Press, vol. 117(1), pages 121-148.
    9. Asim Ijaz Khwaja & Atif Mian, 2005. "Do Lenders Favor Politically Connected Firms? Rent Provision in an Emerging Financial Market," The Quarterly Journal of Economics, Oxford University Press, vol. 120(4), pages 1371-1411.
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    Cited by:

    1. Baele, Lieven & Farooq, Moazzam & Ongena, Steven, 2014. "Of religion and redemption: Evidence from default on Islamic loans," Journal of Banking & Finance, Elsevier, vol. 44(C), pages 141-159.
    2. Choudhary, M. Ali & Jain, Anil, 2014. "How public information affects asymmetrically informed lenders: evidence from credit registry reform," MPRA Paper 58917, University Library of Munich, Germany.
    3. Choudhary, M. Ali & jain, Anil K., 2014. "How Public Information Affects Asymmetrically Informed Lenders: Evidence from a Credit Registry Reform," International Finance Discussion Papers 1125, Board of Governors of the Federal Reserve System (U.S.).

    More about this item

    JEL classification:

    • D02 - Microeconomics - - General - - - Institutions: Design, Formation, Operations, and Impact
    • D85 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Network Formation
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance

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