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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
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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- Fall '13