Analyzing the corruption conviction data reported annually by the U.S. Department of Justice, I find, the regional corruption rate (RCR) from 1990 to 2014 in the areas surrounding firms’ headquarters is positively associated with the cost of bank loans. Specifically, a 1% increase in RCR associates with a 4.4 bps increase in loan spread. This result is robust across regressions with additional control variables and one alternative survey measure of corruption, as well as two instrumental variable analyses and propensity score matching. This corruption premium diminishes with a strong lender-borrower relationship, indicating the premium is caused by the uncertainty associated with corruption. Overall, these results suggest that bribes between firms and politicians cause the spillover effects in the loan market; increased transparency in financial reporting serves as a complement with law enforcement to alleviate the potential negative impact of corruption on the U.S. economy.

Keywords: the cost of bank loans, political corruption, information asymmetry