Abstract

To what extent do personal acquaintances between bankers and firms distort lending decisions, operating like a financial friction? This paper investigates credit misallocation driven by the network structure of interlocking directorates in Portugal. Our empirical results show that personal ties between corporate directors and lenders contribute to preferential credit allocation, supporting the literature on favoritism as a financial distortion. However, when we simulate a counterfactual scenario where interlocks are removed and credit is artificially redistributed to equalize marginal returns, we do not observe any significant improvement in aggregate output. This suggests that the macroeconomic impact of such distortions is extremely limited. We argue that this unexpected finding can be explained by the fact that less efficient firms are typically more distant from banks in geodesic terms, which reduces the misallocation effects of favoritism in credit allocation.

Keywords: Interlocking directorates; Firm-bank ties; Credit misallocation.
JEL codes: G21, G34, L14.