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
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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- Fall '13