Losing My Connection: The Dark Side of Bank–Firm Interlocking Directorates

Abstract

The paper examines the causal impact of bank–firm interlocking directorates on a firm’s access to credit. We exploit matched bank–firm panel data containing detailed information on individual loans and on the governing bodies of both the bank and the firm. Identification hinges on the exogenous break up of connections occurring when the supervisory authority places a bank under special administration, resetting its board. For these banks, we compare the dynamics of loans to firms that lost the connection with those of the unconnected firms, chosen through propensity score matching among borrowers from the same banks. We find that the loss of connection is associated with a significant and large drop in the firms’ granted loans, and, in particular, in the credit lines that can be unilaterally modified by the lender in the short term. We also show that the advantages of the connection are due mainly to favouritism, rather than to privileged information flows.