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Political institutions, financial liberalisation, and access to finance: firm-level empirical evidence

Olayinka Oyekola, Sofia Johan, Rilwan Sakariyahu, Oluwatoyin Esther Dosumu and Shima Amini
Additional contact information
Rilwan Sakariyahu: Business School, Edinburgh Napier University
Oluwatoyin Esther Dosumu: Alliance Manchester Business School, University of Manchester
Shima Amini: Department of Finance, University of Leeds

No 2307, Discussion Papers from University of Exeter, Department of Economics

Abstract: Worldwide, lack of access to finance has been identified by many firms as the most detrimental obstacle facing business entities. This article studies how political institutions and financial liberalisation alleviate or deepen financial constraints faced by firms. We hypothesise that a complementarity exists between political institutions and financial liberalisation in constructing barriers to firms securing bank financing. Evidence from an international sample of over 63,000 firms in 75 countries, establishes that political institutions, proxied by democracy level in a country, and financial liberalisation, proxied by entry and participation of foreign banks, are significant factors in explaining cross-country disparities in firm-level credit accessibility. Importantly, we find a strong support for our proposition, documenting a remarkably significant and sizeable positive interaction effect between foreign bank presence and the level of democracy for access to finance. These results are robust against various forms of sensitivity checks. Overall, our study provides fresh insights into the financing effects of foreign bank activities interacted with democracy on firms. We conclude that these results may be of considerable benefit to policymakers, especially within developing, and emerging, economies, who are searching for economic growth, to re-evaluate what are the primary lending obstacles for their small and medium-sized enterprises.

Keywords: financial liberalisation; foreign banks; political institutions; access to finance; credit constraints; firm-level data (search for similar items in EconPapers)
JEL-codes: G21 G23 G32 O16 (search for similar items in EconPapers)
Date: 2023-05-15
New Economics Papers: this item is included in nep-ban, nep-bec, nep-cfn, nep-dev, nep-ent, nep-fdg, nep-inv, nep-pol and nep-sbm
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