Crony Capital? Corporate Debt Maturity in Thailand before the Financial Crisis

The allocation of credit by banks and finance companies 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 and finance companies, which in turn percolated down to firms having crony ties to banks or finance companies as soft-budget constraints for projects of uncertain quality. Such soft-budget constraints should be reflected in preferential access to long-term credit for firms with close ties to banks or finance companies. Using pre-crisis data on borrowing patterns in Thailand, we find that firms with crony ties to banks or finance companies 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 played almost no role in explaining the allocation of long-term credit. It is difficult to avoid the interpretation that cronyism was by far the main driver of pre-crisis lending patterns.