Organizational hierarchy, institutions, and local market structure

Abstract

This paper studies the impact of institutions on bank organizational hierarchy. Using a unique bank-level survey dataset, I introduce a new and direct measure of organizational hierarchy and exploit the distinctive feature of multinational banks which face different institutional environments in the countries where they operate. I find that the same parent bank is more likely to grant decision-making authority to its foreign affiliates operating in countries with stronger institutions than to affiliates operating in weaker institutional environments. Combining the bank- with firm-level data (with detailed loan information), I further find that a strong institutional environment which favors a decentralized organizational structure leads to better lending terms to SMEs. Decentralized banks grant loans with longer maturities and lower interest rates; they are less likely to require collateral than their centralized counterparts. However, decentralized banks offer better lending terms only when faced with competition from other decentralized banks in the locality they serve, whereas they offer worse lending terms when they have market power. These findings further our understanding of how bank organizational structure serves as a channel through which law affects lending.