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Loans to distressed firms: Political connections, Related lending, Business Group Affiliation and Bank Governance

Author

Listed:
  • Sung Wook Joh
  • Ming Ming Chiu

Abstract

Financial institutions (FIs) suffered from non-performing loans when debt-ridden firms failed. Nonetheless, FIs in Korea increased loans to distressed firms in the 1990s. Possible explanations for these loans include FIs having better inside information on borrowing firms, firms' sharing resources with its business group affiliated firms, firms' political connections, related lending (FI affiliation), or FIs' moral hazards (poor FI governance). We examined 6,474 non-financial firms' capital structures and performances during 1990-2000. Distressed firms had higher leverage ratios and leverage growth rates. Furthermore, firms in distress, with higher leverage growth rates or political connections tended to show both lower ex-post ability to pay debt and lower return on assets, suggesting that FIs did not benefit from inside information when making lending decisions regarding distressed firms. Firms in distress, with political connections, or with FI affiliations all had higher leverage growth rates. Among distressed firms, those affiliated with business groups had higher leverage growth. Together, these results support the claims that business group affiliations, political connections, and related lending affected lending practices. Distressed firms without any business group affiliations, political connections, or FI affiliations also showed higher leverage growth rates, supporting the claim of poor FI governance.

Suggested Citation

  • Sung Wook Joh & Ming Ming Chiu, 2004. "Loans to distressed firms: Political connections, Related lending, Business Group Affiliation and Bank Governance," Econometric Society 2004 Far Eastern Meetings 790, Econometric Society.
    • Handle: RePEc:ecm:feam04:790
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    Citations

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    Cited by:

    1. Raoul Minetti & Sung-Guan Yun, 2015. "Institutions, Bailout Policies, and Bank Loan Contracting: Evidence from Korean Chaebols," Review of Finance, European Finance Association, vol. 19(6), pages 2223-2275.
    2. Halford, Joseph T. & Li, Chengcheng, 2020. "Political connections and debt restructurings," Journal of Corporate Finance, Elsevier, vol. 65(C).
    3. Ufuk Akcigit & Salomé Baslandze & Francesca Lotti, 2023. "Connecting to Power: Political Connections, Innovation, and Firm Dynamics," Econometrica, Econometric Society, vol. 91(2), pages 529-564, March.
    4. Acemoglu, Daron & Johnson, Simon & Kermani, Amir & Kwak, James & Mitton, Todd, 2016. "The value of connections in turbulent times: Evidence from the United States," Journal of Financial Economics, Elsevier, vol. 121(2), pages 368-391.
    5. Diallo, Boubacar, 2017. "Corporate governance, bank concentration and economic growth," Emerging Markets Review, Elsevier, vol. 32(C), pages 28-37.
    6. Christopher F. Baum & Mustafa Caglayan & Dorothea Schäfer & Oleksandr Talavera, 2008. "Political patronage in Ukrainian banking1," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 16(3), pages 537-557, July.
    7. Stephen Haber & Enrico Perotti, 2008. "The Political Economy of Financial Systems," Tinbergen Institute Discussion Papers 08-045/2, Tinbergen Institute.
    8. Mara Faccio, 2010. "Differences between Politically Connected and Nonconnected Firms: A Cross‐Country Analysis," Financial Management, Financial Management Association International, vol. 39(3), pages 905-928, September.
    9. Alam, Ahmed W. & Houston, Reza & Farjana, Ashupta, 2023. "Geopolitical risk and corporate investment: How do politically connected firms respond?," Finance Research Letters, Elsevier, vol. 53(C).
    10. Lehrer, Nimrod David, 2018. "The value of political connections in a multiparty parliamentary democracy: Evidence from the 2015 elections in Israel," European Journal of Political Economy, Elsevier, vol. 53(C), pages 13-58.
    11. Hossain, Ashrafee Tanvir & Hossain, Takdir & Kryzanowski, Lawrence, 2021. "Political corruption and corporate payouts," Journal of Banking & Finance, Elsevier, vol. 123(C).
    12. Ashrafee Tanvir Hossain & Lawrence Kryzanowski & Xiao Bing Ma, 2020. "U.S. Political Corruption And Loan Pricing," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 43(3), pages 459-489, August.
    13. Benjamin M. Blau & Todd G. Griffith & Derek Larsen & Ryan J. Whitby, 2022. "Corporate lobbying and the value of firms: The case of defense firms and the 9/11 terrorist attacks," International Review of Finance, International Review of Finance Ltd., vol. 22(4), pages 759-769, December.
    14. Benjamin M. Blau, 2017. "Lobbying, political connections and emergency lending by the Federal Reserve," Public Choice, Springer, vol. 172(3), pages 333-358, September.
    15. Ghada Tayem, 2019. "The Division of Ownership and Control in Listed Jordanian Firms," Working Papers 1298, Economic Research Forum, revised 2019.
    16. Enrico Perotti, 2013. "The Political Economy of Finance," Tinbergen Institute Discussion Papers 13-034/IV/DSF53, Tinbergen Institute.
    17. Jenifer Piesse & Roger Strange & Fahad Toonsi, 2012. "Is there a distinctive MENA model of corporate governance?," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 16(4), pages 645-681, November.
    18. Parsley, David & Faccio, Mara, 2006. "Sudden Deaths: Taking Stock of Political Connections," CEPR Discussion Papers 5460, C.E.P.R. Discussion Papers.
    19. Faccio, Mara & Parsley, David C., 2009. "Sudden Deaths: Taking Stock of Geographic Ties," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(3), pages 683-718, June.
    20. Claessens, Stijn & Yurtoglu, B. Burcin, 2013. "Corporate governance in emerging markets: A survey," Emerging Markets Review, Elsevier, vol. 15(C), pages 1-33.
    21. Salome Baslandze, 2018. "Connecting to Power: Political Connections, Innovation, and Firm Dynamics," 2018 Meeting Papers 1036, Society for Economic Dynamics.

    More about this item

    Keywords

    Political lending; Related lending; Business Group Affiliation and Bank Governance;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G33 - Financial Economics - - Corporate Finance and Governance - - - Bankruptcy; Liquidation
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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