1 the remaining industry is the agribusiness industry

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Unformatted text preview: auer (1996) and Demirg¨c-Kunt u¸ 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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