| Abstract | Taking costs of bank loans as an example, the paper examines the “collective punishment” caused by affiliated firms whose reputation is impaired. We find that when the reputation of a member is impaired, other “innocent” members in the business group will be punished: their costs of bank loans will be raised significantly by 0.04 (37.56%) on average. This finding implies that apart from being influenced by individual factors, the external financing of affiliated firms is also influenced by the reputation of the group. Moreover, we find that this effect is more pronounced in private companies and in institutions where the financial market and legal protection is better. This indicates that in the transition economy of China, the reputation of business group, as an informal institution, has a significant impact on the external financing of affiliated firms, and is complementary to formal institutions. |