Trust or Opportunity? Managing Corporate Lending Networks if Institutions Are Weak
Abstract: That social capital matters in corporate lending relations is uncontested. While the literature has largely focused on the quality of dyadic firm-bank ties in explaining corporate credit access, we suggest a supply side perspective of lending networks surrounding individual corporations. Our theory predicts that corporations benefit from network closure in their lending networks, but less so, if institutional conditions surrounding the firm guarantee the predictable enforcement of credit contracts. We use a panel of 515 corporations listed on China’s Stock Exchanges holding a total of 7009 major bank loans granted by 183 distinct banks during the period from 2007 to 2012 to test our theoretical framework. Our findings support the hypothesized positive effect of closure. Our findings also robustly confirm that closure offers fewer advantages if the institutional environment provides credible mechanisms helping to produce institutionalized trust between contract partners. These findings are robust to various specifications. More generally our findings contribute to the relational lending literature as well as an emerging literature highlighting how the interplay between network structures and formal institutions shapes individual and corporate strategies.