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Distance Constraints: The Limits of Foreign Lending in Poor Economies



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    • Atif Mian is from the Graduate School of Business, University of Chicago; e-mail: I am extremely grateful to the State Bank of Pakistan (SBP) for providing the data used in this paper. My heartfelt thanks to Abid Qamar at SBP for clarifying many data related questions. The results in this paper do not necessarily represent the views of the SBP. I also thank Marriane Bertrand, Doug Diamond, Steve Kaplan, Asim Ijaz Khwaja, Raghu Rajan, Jose Liberti, Tobias Moskowitz, Sendhil Mullainathan, Paola Sapienza, Antoinette Schoar, Jeremy Stein, Philip Strahan, Per Stromberg, Luigi Zingales, and seminar participants at Chicago, Yale, Columbia, and NBER corporate finance meeting for helpful comments and suggestions. All errors are my own.


How far does mobility of multinational banks solve problems of financial development? Using a panel of 80,000 loans over 7 years, I show that greater cultural and geographical distance between a foreign bank's headquarters and local branches leads it to further avoid lending to “informationally difficult” yet fundamentally sound firms requiring relational contracting. Greater distance also makes them less likely to bilaterally renegotiate, and less successful at recovering defaults. Differences in bank size, legal institutions, risk preferences, or unobserved borrower heterogeneity cannot explain these results. These distance constraints can be large enough to permanently exclude certain sectors of the economy from financing by foreign banks.

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