The worth of connections: An assessment of the impact of interlocking directorates on resources allocation

To what extent do connections between bankers and firms distort lending decisions, acting as a misallocative financial friction? This paper examines credit misallocation arising from the network of interlocking directorates in Portugal. We show empirically that ties between firms and lenders generate preferential lending, in contrast to the relationship-lending view that such ties primarily alleviate asymmetric information. Yet in a counterfactual where interlocks are removed and credit is reallocated to equalize marginal returns across firms, aggregate output barely moves. This muted macroeconomic response implies that the distortions induced by favoritism are surprisingly limited. We argue that this result stems from the fact that less efficient firms are located farther from banks in the network-greater geodesic distance restricts their access to preferential credit-thereby attenuating the misallocative impact of interlock-driven favoritism.