Unformatted text preview: auer (1996) and Demirg¨c-Kunt
14 and Maksimovic (1999) argue that ﬁrms are more likely to choose debt maturity in order to
match the maturity of borrowing with the maturity of their assets. Therefore, ﬁrms tend to
need more long term funding to ﬁnance their investment in ﬁxed assets.
Fourth, we include the standard deviation of the percentage changes in sales over the period
1991-1995 (S.D. (sales 1992-95) to control for the volatility of earning. The volatility of earning
is positive related to the level of the asymmetric information problem the ﬁrm faces when trying
to acquire long term loans. We expect that higher risk ﬁrms are likely to have diﬃculty obtaining
long term debt.
Finally, we include a measure of leverage deﬁned as the ratio of total liabilities to total
assets to control for the probability of being in ﬁnancial distress. Firms with high probability
of default risk are likely to have a greater likelihood of ﬁnancial troubles. These high default
risk ﬁrms are likely to be have diﬃculty obtaining long term debt since creditors would require
high interest rates for bearing the long term credit risk.
To capture the variation in borrowing decisions due to industry characteristics, we include
21 dummy variables. These 21 dummies represent ﬁrms in the 21 industries that are described
in section 3.1. The remaining industry is the agribusiness industry. 4 Empirical evidence Table 4 and Table 5 provide the comparison of mean and median values of ﬁnancing structure
and ﬁrms characteristics between ﬁrms with and without bank connections. Table 4 presents
comparison between ﬁrms that are connected to the inﬂuential families and those that are
not. Table 5 shows the comparison between ﬁrms that are connected to banks and ﬁnance
companies through their boards of directors. As hypothesized, connected ﬁrms tend to have
relatively more long term loans relative to non connected ﬁrms. However connected ﬁrms appear
to have signiﬁcantly less short term loans when compared to non connected ﬁrms. As a result,
both connected and non connected ﬁrms turn out to be similar in using overall debt. The mean
and median values of total debt to asset ratios for both connected and non connected ﬁrms are
not statistically signiﬁcantly diﬀerent.
We investigate further by testing whether diﬀerences in the use of long term loans between
crony and non crony ﬁrms are attributable to the diﬀerences in the ﬁrm characteristics factors.
Except size, the mean and median values of measures of proﬁtability, tangibility, growth rate, 15 and leverage ratio are similar for the two groups. The results reveal that ﬁrms connected via
both crony relationships and board linkages are signiﬁcantly larger in size. However connected
ﬁrms do not appear to be more proﬁtable or less ﬁnancially risky than non connected ﬁrms.
The results on the univariate analysis are in line with La Porta et al. (2001) on Mexican ﬁrms.
Our primary investigation provides some support for our conj...
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- Fall '13