We could approach the issue from a corporate

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Unformatted text preview: nk is re-financed for the second period, a part of the private return of the entrepreneur finds its way back to the bank. Let us denote this amount by δ. Then we could say that the private benefit of the entrepreneur of the poor quality re-financed firm in the last period becomes Bp − δ and the gain of the bank is Rp + δ if the project succeeds and Lp + δ if the project fails. Assuming the ‘kickback’ δ > 1 is sufficient to demonstrate that the threshold detection probability γ that deters second period refinancing, becomes higher under a regime of cronyism. In other words, the bank will extend second period refinancing to a firm with crony ties in circumstances when it would liquidate a firm that has no such ties. We could approach the issue from a corporate governance perspective by interpreting the government monitoring cost c(γ ) as being inversely related to the quality of corporate governance in the environment. There are two empirical implications we can draw out of this view. First, if c(γ ) is small, implying good corporate governance, the bank will not extend second period refinancing to any poor quality firms. Second, if quality of corporate governance ( c(γ )) is just sufficient to deter second period refinancing to firms in the absence of cronyism, the addition of cronyism (in the form of the kickback δ to the bank) implies that banks will differentially refinance firms with crony ties. 3 3.1 Data and empirical methods Data sources and sample characteristics Our empirical strategy is geared toward investigating whether connections to financial intermediaries affect the likelihood of access to preferential sources of long term loans. Our sample contains data on 270 non-financial companies listed in the Stock Exchange of Thailand in 1996. The data were collected from multiple sources. Our main source of data is the Stock Exchange of Thailand. The database obtained directly from the Stock Exchange of Thailand is a compre7 hensive database which contains data on balance sheet and income statements for individual consolidated companies, equity ownership for both financial and non-financial companies and the board of directors. Additional information is collected from the I-SIM database produced by the Stock Exchange of Thailand. Our sample accounts for 97.08 percent of the market value of all non-financial firms. The characteristics of the companies in the sample are presented in Table 1. Panel A shows the number of companies in the sample classified by industry. The industry groupings follow the classification of the Stock Exchange of Thailand. Panel B presents descriptive statistics for companies in the sample. In general, companies in the sample are not just small or start-up companies. The average number of years since a firm was set up is 21.02 years. The sample includes both large companies and smaller size companies. The book value of total assets varies from a maximum of 179,785 million Baht (7191.40 million USD) to a minimum of 325.82 million Baht (13.03...
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