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SSRN-id302936 - Crony Lending Thailand before the Financial...

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Crony Lending: Thailand before the Financial Crisis Yupana Wiwattanakantang* Hitotsubashi University Raja Kali University of Arkansas Chutatong Charumilind Cornell University March 2002 *Corresponding author. Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University. 2-1 Naka, Kunitachi, Tokyo 186-8603, JAPAN. Tel No.: +81-42-580- 8374. Fax No.: +81-42-580-8333. Email: <[email protected]> We thank Sheridan Titman, Charlie Charoenwong, Masaharu Hanazaki, Joseph Fan, Iwan J Azis, Andreas Savva, Veerawat Kanchanakul, Soma Toshiyuki, Adrian van Rixtel, and audi- ences at University of Arkansas, Cornell University and the 2001 APFA Conference in Bangkok for very helpful comments and discussions. We also thank Prapaporn Nilsuwan for outstanding research assistance.
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Crony Lending: Thailand before the Financial Crisis The allocation of credit by banks on ‘soft’ terms to friends and relatives - often termed cronyism - rather than on the basis of ‘hard’ market criteria in the years leading up to the Asian financial crisis of 1997-98 has been hypothesized as an important cause of the crisis. These practices had their basis in the implicit guarantees provided by the government to banks, which in turn percolated down to firms having ‘crony’ ties to banks as “soft-budget constraints” for projects of uncertain quality. Such soft-budget constraints should be reflected in preferential access to long term bank credit for firms with close ties to banks. Using pre-crisis data on borrowing patterns in Thailand we find that firms with “crony” ties to banks and politicians had greater access to long-term debt than firms without such ties. Surprisingly, we find that a broad range of standard firm characteristics suggested as important factors by the literature on firm finance played almost no role in explaining the allocation of long term bank credit. It is difficult to avoid the interpretation that “cronyism” was by far the main driver of pre-crisis lending patterns. JEL Classification: G30, G32 Keywords: Debt Maturity, Crony Capital, Corporate Governance, Agency Costs, East Asia Financial Crisis, Thailand.
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1 Introduction The Asian Crisis of 1997-98 has brought into sharp focus the distinctions between the relationship- based economic and financial system prevalent in many emerging economies and the arms- length, market-driven system that mainly characterizes the developed economies of Western Europe and North America. One influential view of the crisis (Krugman (1998), Corsetti et al. (1998a), Pomerleano (1998)) goes as far as to suggest that the crisis had it’s origins in the allocation of credit by banks and financial institutions on ‘soft’ terms to friends and relatives - often termed cronyism - rather than on the basis of ‘hard’ market criteria in the years leading up to the crisis. While cronyism is anecdotally accepted as an endemic feature of emerging economies, empirical work linking close ties to preferential finance is scant. The goal of this
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