In specication 2 we include a dummy variable

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Unformatted text preview: ecture that close relationship with financial institutions does matter in such a way that it facilitates more long term lending. In next session, we investigate this issue further using multivariate analysis. [Insert Table 4 here] [Insert Table 5 Here] 4.1 Crony relationships and long term loans We first analyze whether firms with close ties to banks and finance companies obtain relatively more long term loans. Table 6 contains the OLS regression results of the investigation on the effects of crony ties with banks measured by business groups on long term lending. In Specification (1), we present the regression results for all firms that are affiliated to the 60 influential families which is indicated by a dummy variable Influential families. The dummy variable is one if the firm is owned by the 60 influential families documented in Section 3.2. The empirical evidence strongly supports the crony hypothesis that the close ties of personal and political favoritism provide greater access to long term borrowing from banks and finance companies. The coefficient estimates on Influential families are significantly positive at the 5 percent level. As discussed earlier, a number of these influential families also own banks and finance companies. In order to investigate only the effects of crony relationships, we need to eliminate the ownership effects. We rerun the regressions and include dummy variables that separately capture the ownership and the crony effects. In Specification (2), we include a dummy variable, Influential families with banks, to indicate if the firm’s major shareholder also owns at least one bank and finance company. In Specification (3), we include a dummy variable, Influential families with banks, to indicate if the firm’s major shareholder does not own at least one bank and finance company. The results show that all else being equal, affiliates of the influential families that are not the owners of banks access significantly more long term bank debt. This evidence implies 16 that affiliates of the inuential families probably benefit from their owners’ connections with banks, finance companies, as well as politicians. Surprisingly, firms affiliating to the influential families who control banks and finance companies and were widely thought of being in a better position to get more loans do not appear to use more long term debt. Our findings, however, suggest that by owning banks and finance companies does not make it easier for the owners to excess more long term loans. This evidence is inconsistent with what happened in Russia documented in Laeven (2001). A contributory factor to this findings would be the regulation on bank lending. Banks and finance companies are prevented from lending to the insiders by the Commercial Banking and Finance Company Law. The insider lending also includes the lending to firms that are owned by the insiders of more than 30 percent. Since these families own relatively concen...
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