The results reveal that rms connected to the

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Unformatted text preview: long term loans might be attenuated or disappear if firms have strong connections with banks. In this section, we attempt to shed light on this issue. Specifically, we investigate whether the firm-bank ties have any influence on the choices of long term loans via firm characteristics. To test this issue, we need to simultaneously incorporate the crony and the firm characteristic variables. We re-estimate the regressions including the interaction terms between firm-bank connection variables and firm characteristics. The coefficient on a given interaction term measures how the relation between the choice of long term debt and the relevant firm characteristic differs for firms with and without close connections. If the crony relationships overwhelm the effects of firm characteristics on the decisions of long term loans, then the estimated coefficient on an interaction variable for a firm characteristic should be opposite in sign from the non-interaction term. First, we investigate the effects on the firm-bank connections that is measured by the influential families. The results of this regression are presented in Table 8. In column (1), (2), and (3), the firm characteristics are interacted with Influential families, Influential families with banks, and Influential families without banks. Overall, the results provide stronger support for 18 the crony lending hypothesis. Interestingly, for non crony firms that are not affiliated to the influential families, size appears to be a very important determinant of long term lending. The estimated coefficients on firm size are strongly significant at the 1 percent level in all models. However, the coefficients on the interaction term between Influential families dummies and size are consistently insignificant. The results reveal that firms connected to the influential families that both own and do not own banks and finance companies are able to borrow long term independently of their size. Similar to the Mexican lending behavior shown in La Porta et al. (2001), the long term loans borrowed by firms connected to the influential families appear to backed by less collateral. While the coefficients on the fixed asset ratio are positive and consistently significant at the 5 percent level, the estimated coefficients on the interaction terms between the fixed asset ratio and the dummy variables indicating the effects of the influential families either turn out to be significantly negative (in Specification (1)) or insignificant (in Specification (2) and (3)). This evidence suggests that long term loans to non crony firms are always collateralized. In contrast, the influential families seem to either post less collateral against their loans or post no collateral at all. The results in Specification (2) showing the effects of the influential families that control financial institutions are also interesting. Specification (2) presents the results on the effects of the influential families who own banks. While default proba...
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This document was uploaded on 02/28/2014 for the course ECONOMICS fn314 at Harvard.

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