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The views expressed here are those of the authors and not of the institutions they represent. We are grateful

By Rafael La Porta, Florencio López-de-silanes, Guillermo Zamarripa, To John Campbell, Simeon Djankov, Michael Kremer, Ken French, Stewart Myers, Paul Romer, David Scharfstein, Andrei Shleifer, Jeremy Stein, Tuomo Vuolteenaho, Luigi Zingales, To Lucila Aguilera, Juan Carlos Botero, Jamal Brathwaite, Claudia Cuenca, Mario Gamboa-cavazos, Soledad Flores, Martha Navarrete, Ro Ponce and Ekaterina Trizlova For Excellent Arm’s-length


In many countries, banks lend to related parties, e.g., to firms controlled by the bank’s owners. We examine the benefits of related lending using a newly assembled dataset for Mexico. We find that related lending is large (20 % of commercial loans) and that it takes place on better terms than arm’s-length lending (annual interest rates are 4 percentage points lower). Related loans are 33 % more likely to default and, when they do, have lower recovery rates (30 cents/dollar less) than unrelated ones. The evidence supports the view that related lending, rather than enhancing information sharing, is a manifestation of looting

Year: 2001
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