Consequently they are forced to rely excessively on

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Unformatted text preview: ions appear to bring more long term loans to the firms only when the connections are not via the controlling shareholders. The firms where their controlling shareholders are sitting on the board of banks do not appear to obtain long term loans on preferential volume terms. This is probably because of the law that limits insider lending discussed in Section 4.1. The results also show that establishing the board connections either through having the firm’s controlling shareholder sitting on a board of banks or having other directors from the bank to the firm boards or vice versa are beneficial to the firms (Specification (3) and (4)). The crony relationship appears to be more important than the firm characteristic factors in obtaining long term loans. Banks seem to be more strict on non crony firms when lending to them. Specifically, long term loans seem to be granted to larger firms, firms with more tangible assets and firms with more stable profit. In contrast, when banks lend to the crony firms, the lending decisions are not affected by the firm characteristics at all. None of the estimated coefficients on the interaction terms between the crony dummies and the firm characteristics turn out to be statistically distinguishable from zero. [Insert Table 11 Here] [Insert Table 12 Here] 6 Conclusion We find that for Thai firms, the presence of close ties with banks and politicians – often referred to as ‘cronyism’ – was by far the most important factor in determining access to long term debt prior to the Asian Crisis of 1997-98, to the almost complete disregard of standard firm characteristics. While Thailand provides perhaps the best laboratory for the testing of the cronyism hypothesis in the shadow of the crisis, we are inclined to believe similar results might be found in many other emerging economies. In the wake of the crisis it is easy to implicate such practices. 24 And probably with good cause. However, it is perhaps more useful to ask why such practices existed in the first place, and did they play a role in insulating and facilitating these economies during their earlier periods of rapid growth. It is useful to juxtapose these ideas with the recent arguments of Diamond and Rajan (2000c) on banks, short-term debt and financial fragility. They argue that countries with poor disclosure rules and inadequate investor protection will be expected to have limited long-term debt capacity. Consequently they are forced to rely excessively on short-term debt, which in turn causes them to be financially fragile and prone to crises. Could then soft- budget constraints serve a useful purpose at a low level of institutional (under)development and become obsolete as the economy develops further? It is difficult to understate the need for further theoretical and empirical work on these issues. 25 References Barclay, Michael J., and Clifford W. Smith, 1995, The marturity structure of corporate debt, Journal of Finance 40, 609...
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