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Bank Ownership and Margins of Trade: Evidence from a Firm-Bank Matched Dataset

Research output: Working paper



Does a bank's ownership matter for a firm's performance (to which it is connected)? Especially, in the event of a crisis? I study this question through the effect of 2008-09 crisis to provide evidence on a new channel which matters significantly for a firm's export performance - bank ownership. In particular, I find: (a) firms connected to private and/or foreign banks earn around 7.7- 39% less in terms of their export earnings during the crisis as compared to firms' having banking relationships with public-sector banks. This happened as the public-sector banks were differentially treated by the Central Bank of India during the crisis due to a clause in the Indian Banking Act of 1969; (b) effect is concentrated only on the intensive margin of trade; (c) drop in exports is driven by firms' client to big domestic-private banks and banks of US origin; (d) firms
not connected to public-sector banks also laid-o¤ workers (both managers and non-managers), employed less capital and imported less raw materials. In addition, I also find that firms with lower average product of capital (than the median) received about 50% more loans from the public-sector sources, suggesting a significant reinforcement of inefficiency in the Indian economy
due to misallocation of credit.