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Crony Lending: Thailand before the Financial Crisis

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

Abstract

The allocation of credit by banks on 'soft' terms to friends and relatives - often termed cronyism - rather than on the basis of 'hard' market criteria in the years leading up to the Asian financial crisis of 1997-98 has been hypothesized as an important cause of the crisis. These practices had their basis in the implicit guarantees provided by the government to banks, which in turn percolated down to firms having 'crony' ties to banks as soft-budget constraints for projects of uncertain quality. Such soft-budget constraints should be reflected in preferential access to long term bank credit for firms with close ties to banks. Using pre-crisis data on borrowing patterns in Thailand we find that firms with crony ties to banks and politicians had greater access to long-term debt than firms without such ties. Surprisingly, we find that a broad range of standard firm characteristics suggested as important factors by the literature on firm finance play a much less significant role in explaining the allocation of long term bank credit. Consequently, it is difficult to avoid the interpretation that 'cronyism' was by far the main driver of pre-crisis lending patterns.

Suggested Citation

  • Charumilind, Chutatong & Kali, Raja & Wiwattanakantang, Yupana, 2002. "Crony Lending: Thailand before the Financial Crisis," CEI Working Paper Series 2002-4, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
  • Handle: RePEc:hit:hitcei:2002-4
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    File URL: http://hermes-ir.lib.hit-u.ac.jp/rs/bitstream/10086/13940/1/wp2002-4a.pdf
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    References listed on IDEAS

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    1. Wiwattanakantang, Yupana, 2001. "Controlling shareholders and corporate value: Evidence from Thailand," Pacific-Basin Finance Journal, Elsevier, vol. 9(4), pages 323-362, August.
    2. Pomerleano, Michael, 1998. "The East Asia crisis and corporate finances : the untold micro story," Policy Research Working Paper Series 1990, The World Bank.
    3. Paola Bongini & Stijn Claessens & Giovanni Ferri, 2001. "The Political Economy of Distress in East Asian Financial Institutions," Journal of Financial Services Research, Springer;Western Finance Association, vol. 19(1), pages 5-25, February.
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    Cited by:

    1. H. Soral & Talan İşcan & Gregory Hebb, 2006. "Fraud, banking crisis, and regulatory enforcement: Evidence from micro-level transactions data," European Journal of Law and Economics, Springer, vol. 21(2), pages 179-197, April.
    2. Adrian E. Tschoegl, 2004. "Financial Crises and the Presence of Foreign Banks," International Finance 0405016, EconWPA.
    3. Stijn Claessens & Joseph P. H. Fan, 2002. "Corporate Governance in Asia: A Survey," International Review of Finance, International Review of Finance Ltd., vol. 3(2), pages 71-103.

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