More precisely they are likely to put pressure on

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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 less leverage. 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...
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This document was uploaded on 02/28/2014 for the course ECONOMICS fn314 at Harvard.

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