Bank ownership and connected lending

- The need for special connections is used as a proxy measure of connected lending.
- Cash flow rights of the controlling owners raise the need for special connections.
- The increase becomes smaller as the cash flow rights increase.
- Cash flow rights do not reduce the need for special connections.
- To reduce connected lending, a widely held bank is preferred to a closely held bank.

Bank ownership concentration may not only induce banks' controlling owners to become involved in connected lending but also deter them from doing so. This paper examines how the cash flow rights of the banks' controlling owners are associated with the need for special connections with banks, which is a proxy measure of connected lending. Using data from more than 2,600 firms across 25 countries, this study finds that the cash flow rights increase the need for special connections, but the increase becomes smaller as the cash flow rights increase. No evidence is found that the cash flow rights result in a decrease in the need for special connections.