Institutional environment and bank loans: Evidence from 25 developing countries

• Published date: 01 March 2018
• Author: Tingqiu Cao,Xianhang Qian,Chunfang Cao
• DOI: http://doi.org/10.1111/corg.12197
• Date: 01 March 2018

EMPIRICAL

Institutional environment and bank loans: Evidence from 25

developing countries

Xianhang Qian

1

|Tingqiu Cao

1

|Chunfang Cao

2

1

School of Economics, Shandong University,

China

2

School of Accounting, Southwestern

University of Finance and Economics, China

Correspondence

Xianhang Qian, School of Economics,

Shandong University, No. 27 Southern Shanda

Road, Jinan 250100, Shandong Province,

China.

Tel: +86‐15990908501;

Email: qxhsdu02@163.com

Funding information

National Natural Science Foundation of China,

Grant/Award Number: 71302088 and

71272119.

Abstract

Manuscript Type: Empirical

Research Question/Issue: This study tries to verify the impact of institutional environment,

namely legal protection, law enforcement, trust and religion, on bank loans in the context of

developing countries. In addition, we investigate the interactive effect of formal and informal

institutions.

Research Findings/Insights: Using survey data on enterprises from 25 developing coun-

tries, we find that institutional environment can significantly affect bank loans in developing

countries. Compared with formal institutions, informal ones are relatively efficient at alleviating

enterprises’financial constraints, while law enforcement is more important than legal protection

within the set of formal institutions. The split‐sample tests indicate that informal and formal insti-

tutions have substitutive effects on firms’loan financing.

Theoretical/Academic Implications: This study provides evidence of the impact of institu-

tions on loan contracts in developing countries and sheds light on the importance oflaw enforce-

ment and informal institutions. It suggests new avenues of research on the loan contract from a

neo‐institutional perspective.

Practitioner/Policy Implications: This study offers inspiration to the governments of

developing countries interested in promoting enterprise development. In addition, it provides

efficient methods that entrepreneurs can use to reduce the financing constraints on enterprises

in the context of lower legal protection.

KEYWORDS

Corporate Governance, Bank Loans, Developing Countries, Institutional Environment

1|INTRODUCTION

Bank loans are the dominant source of external finance for corpora-

tions in most economies across the world (Demirgüç‐Kunt & Levine,

2001), but limits to credit access remain a worldwide problem today

(Banerjee & Duflo, 2014). Therefore, it is important to investigate the

factors affecting bank loans so as to alleviate the financing constraints

for enterprises. North (1990) emphasizes the core effect of institutions

on transaction contracts, and argues that how institutions affect loan

contracts has been a focus of attention in academic research. Taking

measurability into consideration, a lot of studies have explored the

relationship between formal institutions, especially legal protection

for creditors, and bank loans. The results show that the level of legal

protection will affect loans in terms of volume, interest rate, term,

and collateral requirements (Bae & Goyal, 2009; Esty & Megginson,

2003; Hass, Ferreira, & Taci, 2010).

However, most of the aforementioned studies were based on

samples from developed countries which have higher‐quality institu-

tions and enforcement. Thus, the applicability of the conclusions to

the setting of developing countries is questionable due to the large dif-

ferences in institutions. For example, in developed countries, a bank

will not have to worry about institutional risk when lending to a firm,

as formal institutions provide sufficient protection to banks. Banks

are willing to reduce their collateral requirements when the level of

legal protection improves. Thus, informal institutions play a limited role

in developed countries. Conversely, there are lower quality formal

institutions in developing countries, especially in terms of law enforce-

ment. Even when laws and regulations have been established, their

Received: 8 December 2015 Revised: 9 January 2017 Accepted: 10 January 2017

DOI: 10.1111/corg.12197

84 © 2017 John Wiley & Sons Ltd Corp Govern Int Rev. 2018;26:84–96.wileyonlinelibrary.com/journal/corg