2000 monitoring can be quite costly for the government

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Unformatted text preview: term refinancing of bad projects. However, if the institutions of corporate governance are poorly developed, as is often the case in emerging economies (Johnson et al. (2000)), monitoring can be quite costly for the government, and even if long-term financing is prevented to non-crony firms, banks may still find it worthwhile to extend such financing to crony firms. We present a simple analytical framework along these lines in section 2 in order to ground our empirical approach to the issue. Our empirical methodology attempts to examine whether firms with crony ties to banks have easier access to long term debt than firms without such ties. We use a number of measures, such as affiliation to one of the 60 largest Thai business groups, and the presence of bankers on the board of the firm and as executives in the firm as proxies for “crony” ties. We find that these crony ties are by far the most important factor explaining access to long term debt. Surprisingly, we find that a host of standard firm characteristics that the current literature on firm financing suggests should be important in explaining easier access to debt play much less significant role. We suggest these results lend strong support to the hypothesis that cronyism was the most important factor determining access to long term bank debt prior to the financial crisis. 1 As quoted in the Financial Times 1/12/98, Jan Cherim, Country Manager for ING Bank in Thailand, said, “Every time we saw the Bank of Thailand they would tell us ‘Finance One is OK. We’re backing it all the way. When they didn’t you had to question just about everything they’d ever told you.” 2 Our paper is related to the growing literature that examines the impact of connections on firm performance. The paper closest to our approach is La Porta et al. (2001). They examine the benefits of related lending using a newly assembled dataset on Mexico. They find that related lending is present in 20% of commercial loans and that it takes place on more favorable terms than arms-length lending. They also find that related loans are more likely to default, and when they do, have significantly lower recovery rates than unrelated loans. It is noteworthy that our results for a different emerging market, Thailand, are essentially consistent with theirs. Recent papers by Fisman (2001) and Johnson and Mitton (2001) examine the role of political connections on firm performance in the context of emerging economies. Fisman (2001) estimates the value of political connections in Indonesia by looking at how stock prices moved when former President Suharto’s health was reported to change. Johnson and Mitton (2001) examine the impact of connections in Malaysia by looking at the fall in the market value of connected firms in the wake of the Asian financial crisis and the subsequent reinstatement of capital controls that differentially benefited firms with connections. Both papers find significant evidence for the value of connec...
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