This preview shows page 1. Sign up to view the full content.
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...
View Full Document
- Fall '13