Politically connected lending, government capital injection, and bank performance

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Title:	Politically connected lending, government capital injection, and bank performance
Authors:	Jou, Rosemary;Chen, Shi;Tsai, Jeng-Yan
Keywords:	Government capital injection;Ownership structure;Political connection;Barrier option
Date:	2017-01
Issue Date:	2017-03-21 02:10:38 (UTC+8)
Publisher:	Elsevier BV
Abstract:	This paper takes a contingent claim approach to evaluate the equity and risk of a bank. The paper investigates how government capital injection affects the bank's lending and equity risk, and how these effects vary across remaining privately owned and becoming government-owned. In particular, we argue that the strength of government ownership is useful in disciplining management of preferential access to debt financing for politically connected borrowing firms. It is shown that government capital injection leads to superior performance and greater safety for the bank remaining privately owned. The advantage of large capital is likely to be more pronounced to equity return, but less to safety for the government-owned bank. Moreover, political connection reinforces the increased return performance and safety. Government capital injection as such makes the bank less prone to risk-taking, thereby affecting the stability of the banking system.
Relation:	International Review of Economics and Finance 47, p.220-232
DOI:	10.1016/j.iref.2016.10.011
Appears in Collections:	[Graduate Institute & Department of International Business] Journal Article

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