Using a sample of China's listed private firms,we investigate the relationship between bank connection,corruption and collateral requirements.We find that when a firm is connected with banks,collateral requirements are significantly lower.We also find that bank connection is the channel through which corruption is exercised to benefit those firms with favoured loan terms.We further find that corruption through bank connection works more effectively in reducing collateral requirement when firms face higher expected level of government intervention.Our analysis further reveals that bank connection and corruption have jointly improved bank lending efficiency.We argue that in an emerging market,bank connection facilitates rent seeking and helps private firms to access bank loans with favoured loan terms,and this relationship-based financing relies on corruption.Overall,our results are consistent with the view that in an emerging market private sector growth is supported by relationship-based external financing and unconventional governance methods.
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