This preview shows page 1. Sign up to view the full content.
Unformatted text preview: marize, ﬁrms that are connected to banks either through crony relationship or board
links obtain more long term loans. Preferential lending to crony ﬁrms is not related to ﬁrm
characteristics regarding size, proﬁtability and risk factors. Long term loans to the inﬂuential
families do not vary with ﬁrm’s size. Their loans are likely to backed by less collateral. Banks
appear to favor the ﬁrms that have board connections by extending them more long term loans.
In addition, the loans to the connected ﬁrms are not tied to any ﬁrm characteristics.
[Insert Table 8 Here]
[Insert Table 9 Here] 20 5 Robustness tests To test the robustness of our ﬁndings, we ﬁrst examine what are the factors that determine the
allocation of the board connections. This is in order to show whether the presence of the board
connections is associated with the agency cost problems or is aﬀected by the crony relationship.
If the crony relationship aﬀects the establishment of the board connections with banks, then
our Board connection variable is indeed a good proxy for the crony relationship. Next, we
investigate whether the eﬀect of the board representation on providing more long term loans to
the connected ﬁrms remains if we exclude ﬁrms that have common ultimate owners with banks. 5.1 The determinants of board connections As discussed in Section 3.1, a majority of ﬁnancial institutions in Thailand are controlled by
families who also control non ﬁnancial companies. We investigate whether the incidence of
being a major shareholder of a bank is associated with the incidence of the board connections.
Kroszner and Strahan (2001b) argue that the board connections might generate conﬂicts of
interests between creditors and borrow ﬁrms especially when the ﬁrms are facing ﬁnancial
diﬃculties. The basic implication of this view is that when the ﬁrms experience ﬁnancial
distress, either bankers who are sitting on the ﬁrms’ boards or directors of the borrowing ﬁrms
who are sitting on the banks’ boards tend to act on behalf of the ﬁrms. More precisely, they are
likely to put pressure on banks to provide the ﬁrms more loans. Since lending to trouble ﬁrms
have high probability of default rate, the lending practices may in turn bankrupt the banks.
Hence, banks are likely to avoid having connections with unstable ﬁrms. On the contrary, banks
are likely to establish connections in which the potential of conﬂicts are likely to emerge. These
ﬁrms are larger ﬁrms, ﬁrms with more tangible assets, more stable in term of proﬁtability, and
In contrast, the crony view conjectures a diﬀerent prediction. If the banking system is
protected by implicit guarantees that provide the insurance for banks from going bankrupt, the
conﬂicts of interests between banks and borrowing ﬁrms might be soften. Fully recognizing that
the government bears the costs of any ﬁnancial distress, banks may build the board connections
with ﬁrms that owned by their families and friends. In the extreme case, the connections...
View Full Document
This document was uploaded on 02/28/2014 for the course ECONOMICS fn314 at Harvard.
- Fall '13