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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
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.
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- Fall '13