The debt maturity decisions of these rms however are

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Unformatted text preview: bility, measured by the liability to asset ratio, has no significant impact on the choice of long term debt for non crony firms, default probability does have positive effects in the case firms connected to the influential families with the ownership of banks. The coefficient on the interaction term between the crony firm dummy and the liability to asset ratio is strongly significant at the 1 percent level. However this is not the case for the firms connected to the influential families that do not control banks (Specification (3)). Firms with high default risk have the incentives to use more long term loans to help them avoid being liquidated (Diamond (1991b)). Creditors, however, try to avoid lending to these firms. Our results suggest that only firms affiliating to the influential families that own banks appear to be able to use more long term debt despite facing a higher probability of being in financial troubles. By controlling banks and finance companies, the business group families might be able to direct themselves more long term loans. Specification (2) also shows that among firms affiliated with the influential families that 19 own banks, there is a negative and significant relationship between the proportion of long term lending and M-B ratio. The result, however, is inconsistent with the argument that the close ties with banks established via both share and debt holdings mitigate the agency costs of debt as in Japan and the US. If banks do play an active role in corporate governance, a positive relationship between the measure of growth opportunities and the reliance of long term loans is expected. This is in fact the case in the US firms documented in Houston and James (1996). Similar results shown when the connections are via the boards of directors (Table 9). Consistent with our crony hypothesis, firms that have strong ties with bank boards run appear to use higher long term loans. The debt maturity decisions of these firms, however, are not influenced by any firm characteristic factors. Interestingly, the coefficients on the interaction term between the three dummies indicating the presence of board connections, and the five firm characteristic variables turn out to be not significant at all. These results suggest that banks extend favoritism to their connected firms through a board linkage by providing the firms more long term loans and these loans are given independently on firm characteristics. It is noteworthy that our results are in contrast to studies using US data. Kroszner and Strahan (2001a) find that US banks do not lend favorably to connected firms. Connected lending does varies with firm characteristics. More precisely, US banks avoid lending to risky firms that have a higher chance of financial distress. A contributory factor to the differences in the findings is probably the legal and regulatory regimes regarding the protection of outside investor rights. In the US, the protection of outside investor rights is much more effective. To sum...
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