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Connected Lending: Thailand before the Financial Crisis

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Author Info
Charumilind, Chutatong
Kali, Raja
Wiwattanakantang, Yupana

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Abstract

The allocation of credit by banks and financial institutions on 'soft' terms to friends and relatives rather than on the basis of 'hard' market criteria in the years leading up to the East Asian crisis of 1997-98 has been widely noted. Using a detailed dataset on Thai firms prior to the crisis period we examine whether business connections were in fact a good predictor of preferential access to long term bank credit. We find that firms with connections to banks and politicians had greater access to long-term debt than firms without such ties. Connected firms need much less collateral to obtain long term loans than those without connections. Such firms obtain more long term loans, and appear to use less short term loans. We do not find support for the existence of connections between banks and firms serving to reduce asymmetric information problems. Our results thus lend support to the hypothesis that the presence of connections was the most important factor determining access to long term bank debt prior to the financial crisis and are consistent with recent research implicating weak corporate governance in the extent and severity of the crisis.

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Paper provided by Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University in its series CEI Working Paper Series with number 2003-19.

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Length: 44 p.
Date of creation: Jul 2003
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Handle: RePEc:hit:hitcei:2003-19

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Related research
Keywords: Agency Costs; Capital Structure; Corporate Governance; Crony Capital; Debt Maturity; East Asian Financial Crisis; Thailand;

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Find related papers by JEL classification:
G30 - Financial Economics - - Corporate Finance and Governance - - - General
G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Capital and Ownership Structure

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Tetsuji Okazaki & Michiru Sawada & Ke Wang, 2005. "The Fall of "Organ Bank" Relationships During the Wave of Bank Failures and Consolidations: Experience in Pre-war Japan," CIRJE F-Series CIRJE-F-379, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
  2. Polsiri, Piruna & Wiwattanakantang, Yupana, 2006. "Corporate Governance of Banks in Thailand," CEI Working Paper Series 2005-20, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  3. Shams Pathan & Michael Skully & J. Wickramanayake, 2007. "Board Size, Independence and Performance: An Analysis of Thai Banks," Asia-Pacific Financial Markets, Springer, vol. 14(3), pages 211-227, September. [Downloadable!] (restricted)
  4. Raphael H. Solomon, 2005. "Pocket Banks and Out-of-Pocket Losses: Links between Corruption and Contagion," Working Papers 05-23, Bank of Canada. [Downloadable!]
  5. Francis , Bill B & Hasan, Iftekhar & Sun, Xian, 2009. "Political connections and the process of going public: evidence from China," Research Discussion Papers 7/2009, Bank of Finland. [Downloadable!]
    Other versions:
  6. Polsiri, Piruna & Wiwattanakantang, Yupana, 2004. "Business Groups in Thailand: Before and after the East Asian Financial Crisis," CEI Working Paper Series 2004-13, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  7. Hanazaki, Masaharu & Horiuchi, Akiyoshi, 2003. "Have Banks Contributed to Efficient Management in Japan's Manufacturing?," CEI Working Paper Series 2003-22, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  8. Dallago, Bruno, 2003. "Comparative Economic Systems and the New Comparative Economics: Foes, Competitors, or Complementary?," CEI Working Paper Series 2003-24, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  9. Randall Morck, 2009. "The Riddle of the Great Pyramids," NBER Working Papers 14858, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  10. Ahn, Sanghoon, 2003. "Technology Upgrading with Learning Cost," CEI Working Paper Series 2003-21, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  11. Bunkanwanicha, Pramuan & Wiwattanakantang, Yupana, 2008. "Big Business Owners in Politics," CEI Working Paper Series 2008-17, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
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  12. Gennaioli, Nicola & Rossi, Stefano, 2008. "Judicial Discretion in Corporate Bankruptcy," CEI Working Paper Series 2008-5, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  13. Gennaioli, Nicola & Rossi, Stefano, 2008. "Optimal Resolutions of Financial Distress by Contract," CEI Working Paper Series 2008-6, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University. [Downloadable!]
  14. Lloyd Steier, 2009. "Familial capitalism in global institutional contexts: Implications for corporate governance and entrepreneurship in East Asia," Asia Pacific Journal of Management, Springer, vol. 26(3), pages 513-535, September. [Downloadable!] (restricted)
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