Abstract

Against the backdrop of a severe financial crisis and extensive restructuring of the financial sector, this paper investigates the evolution and determinants of connections between firms and banks, and the impact of bank connections on corporate investment. We examine a sample of Thai non-financial companies during 1995-2000, a period straddling the East Asian financial crisis of 1997-98. Before the crisis, bankconnections are common and associated with significantly lower sensitivity of corporate investment to internal cash flow suggesting connected firms have easier access to bank finance. After the crisis, far fewer firms are bank-connected firms largely due to substantial changes in the ownership and governance of banks following regulatory reform and financial sector restructuring. Post-crisis, there is no longer a significant difference in investment-cash flow sensitivity of (formerly) connected and non-connected firms suggesting that bank connections are no longer of value. After the crisis, investment decisions appear to be more efficient, and the economy less crisis-prone given the reduced link between cash flow shocks and subsequent investment and output.

Citations