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Connected Lending: Thailand before the Financial Crisis

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  • Charumilind, Chutatong
  • Kali, Raja
  • Wiwattanakantang, Yupana

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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File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/13924/1/wp2003-19a.pdf
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Bibliographic Info

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
Date of revision:
Handle: RePEc:hit:hitcei:2003-19

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

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  1. Pomerleano, Michael, 1998. "The East Asia crisis and corporate finances : the untold micro story," Policy Research Working Paper Series 1990, The World Bank.
  2. Faccio, Mara & Lang, Larry H. P., 2002. "The ultimate ownership of Western European corporations," Journal of Financial Economics, Elsevier, vol. 65(3), pages 365-395, September.
  3. Wiwattanakantang, Yupana, 2001. "Controlling Shareholders and Corporate Value: Evidence from Thailand," CEI Working Paper Series 2001-4, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  4. Bongini, Paola & Claessens, Stijn & Ferri, Giovanni, 2000. "The political economy of distress in East Asian financial institutions," Policy Research Working Paper Series 2265, The World Bank.
  5. John McMillan & Christopher Woodruff, 1999. "Interfirm Relationships And Informal Credit In Vietnam," The Quarterly Journal of Economics, MIT Press, vol. 114(4), pages 1285-1320, November.
  6. Greif, Avner, 1993. "Contract Enforceability and Economic Institutions in Early Trade: the Maghribi Traders' Coalition," American Economic Review, American Economic Association, vol. 83(3), pages 525-48, June.
  7. Khanthavit, Anya & Polsiri, Piruna & Wiwattanakantang, Yupana, 2003. "Did Families Lose or Gain Control after the East Asian Financial Crisis?," CEI Working Paper Series 2003-1, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  8. Simon Johnson & John McMillan & Christopher Woodruff, 2001. "Courts and Relational Contracts," NBER Working Papers 8572, National Bureau of Economic Research, Inc.
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