Unformatted text preview: s or 68.89
percent of the sample have at least one incidence of board connection with those of banks
(Table 3). We investigate further to see the close relationships with bank formalized through
board representation at diﬀerent management levels. Our focus is on two management levels,
namely executives and non executives. An executive is deﬁned as someone who holds one of
the following positions: chairman, honorary chairman, vice-chairman, president, vice-president,
CEO or managing director, vice-CEO and vice managing director. Non-executives are other
directors of the board.
12 Our results reveal that in 13 ﬁrms which accounts for 4.81 percent of our sample, the ﬁrm’s
board is connected with those of banks at the executives level. In about 36.30 percent of the
ﬁrms, the board connections are via the non executive level. Finally, in about 28.15 percent of
the ﬁrms, the board connections are via both the executive and non executive levels. We expect
that top managers who are at the same time serving at the boards of banks are likely to make
it easier for their companies to get long term loans.
[Insert Table 3 Here] 3.3 Empirical methods In order to examine whether strong connections with banks and ﬁnance companies provide
ﬁrms preferential access to long term loans, we use the standard model of the determinants of
debt maturity decision following Barclay and Smith (1995), Stohs and Mauer (1996) Demirg¨¸uc
Kunt and Maksimovic (1999). Speciﬁcally, we estimate a measure of long term loans as a
function of measures of crony relationship and control variables. As a proxy for long term
loans, we use the ratio of long term borrowings from banks and ﬁnance companies to total debt.
Total debt includes short term and long term debt borrowings from banks and other ﬁnancial
intermediaries, long term debt that is due in the current period, and debentures.
Previous studies suggest since it is diﬃcult to monitor ﬁrms due to a high degree of information asymmetry between insiders and outsiders, investors are likely to depend more on
short term loans (Barclay and Smith (1995), Houston and James (1996), and Stohs and Mauer
(1996)). Diamond (1991a) argues that low quality ﬁrms that have insuﬃcient cash ﬂows have
no choice but to resort to short term debt. These ﬁrms are discouraged from using long term
debt because they have low credit rating, and hence bear higher interest costs. As low rated
ﬁrms are not able to participate in the directly placed long-term debt market, they end up
borrowing short term from intermediaries such as banks and ﬁnance companies.
¿From the creditor side, short-term ﬁnancing facilitates monitoring by creditors. With a
short-term loan contract, banks can review the ﬁrm’s decisions more frequently and, if necessary,
vary the terms of ﬁnancing or liquidate the project before suﬃcient losses have accumulated to
make default by the borrower optimal (Diamond (1991b) and Rajan (1992)). With a short-term
loan contract, banks gain a degree of control an...
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- Fall '13