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Financial Collusion and Over-Lending

dc.contributor.authorHwang, Jinyoung
dc.contributor.authorJiang, Neville Nien-Heui
dc.contributor.authorWang, Ping
dc.description.abstractWe build a model consisting of a borrowing firm, a lending institution (bank), and a third party influencing loan decision-making (auditor/government regulator) where a low-type firm can bribe the auditor to file an untruthful report about its true type so as to obtain a loan from the bank to finance a risky project. The main finding is that, depending on the economic environment, the bank may or may not want to deter such a collusion. This implies there may be a sudden shift from a collusion to a no-collusion equilibrium as the economic environment deteriorates. The combination of noticeable gradual deterioration in fundamentals and expectations of a sudden equilibrium-shift can trigger aggressive speculative attacks and passive withdrawals of investments even before the actual equilibrium-shift takes place. We apply this hypothesis to the case of the 1997 Korean financial crisis that features a severe over-lending problem.
dc.publisherVanderbilt Universityen
dc.subjectfinancial crisis
dc.subjectdishonest auditors
dc.subjectJEL Classification Number: D82
dc.subjectJEL Classification Number: G30
dc.subjectJEL Classification Number: O16
dc.titleFinancial Collusion and Over-Lending
dc.typeWorking Paperen

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