DP11840 Democracy and Credit ?Democracy Doesn`t Come Cheap? But At Least Credit to Its Corporations Will Be

Author(s): Manthos Delis, Iftekhar Hasan, Steven Ongena
Publication Date: February 2017
Keyword(s): Democratic Institutions, Loan pricing, Loan Spreads, Reversals
JEL(s): G21, G30, P16, P26, P27, P47
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11840

Does democratization reduce the cost of credit? Using global syndicated loan data from 1984 to 2014, we show that democratization has a sizeable negative effect on loan spreads: a one point increase in the zero-to-ten Polity IV index of democracy shaves on average 21 basis points off spreads. Reversals to autocracy hike spreads more strongly. Our results are robust to the comprehensive inclusion of relevant controls, to the instrumentation with regional waves of democratization, and to a battery of sensitivity tests. We thus highlight the lower cost of loans as one relevant mechanism through which democratization may affect economic development.