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For example in 1996 the bangkok bank of commerce

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Unformatted text preview: ted to not only financial institutions but also the the power structure (Khanna (2000), Bongini et al. (2000) and Chui et al. (2000)). It is also often the case that they are industrial conglomerates. Close ties to banks benefit firms in several ways. For example, the strong relationships with banks might provide preferential treatment and more access to funding. Weinstein and Yafeh (1998) find that Japanese manufacturing firms with strong bank relationships during the period 1977-86 tend to use more capital than independent firms in the same industry when their operating cash flow declined. There is extensive anecdotal evidence that strong ties with banks enables firms connected to influential families in Thailand to receive funding easily ((Thanapornpun (1999)). Interestingly, there are numerous instances of financial institutions that went into financial distress on account of concentrating their loans to only a few business groups, which eventually defaulted. For example, in 1996 the Bangkok Bank of Commerce granted a very large amount of loans to firms that were affiliated to four families, namely Rajan Pillai, Adnan Khashoggi, Rages Sakdina 10 and Suchat Thanchareon. The bank went into financial distress shortly afterward and was subsequently recapitalized by the Financial Institutions Development Fund (FIDF). The FIDF is the government agency that is responsible for rehabilitating financially distressed financial institutions. Similarly, in 1986 the Krung Thai bank had also allocated a large amount of loans to the Srikrungwattana group, Pol Rengprasertwit and Sura Chansrichawala families (Thanapornpun (1999)). Close ties to banks also provide opportunities for firms to obtain economic rents created by various regulations. In many emerging economies, the government encourages banks to lend to big business groups or specific industries, such as in export oriented sectors. For example, in Thailand banks were dictated to provide lower than the market rate loans to agri-business industry in the 1980s. Anecdotal evidence exists of firms with close ties with banks receiving most of these loans. In Korea until the end of the 1980s, banks were dictated by the government to lend to large family-owned business groups (Chaebols ) at low interest rates. Lee et al. (1999) find that Chaebol affiliated firms are in fact more levered than stand alone firms. To identify the country’s most influential families, we use the ranking of group firms in Thailand done by Suehiro (2000). This ranking is done based on sales in 1994. Suehiro (2000) collected accounting and ownership data of companies in each group from the Ministry of Commerce. In addition to the database compiled from the Ministry of Commerce, he used Tara Siam Business Information (1996) as a reference for additional information on company affiliations. For the “influential families” to be a good indicator of the strong connections with banks, the proxy for the “influential families” should include the most well known and wealthy families. Accordingly, we de...
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