Controlling Shareholders and Corporate Value: Evidence from Thailand

This study investigates the effects of controlling shareholders on corporate performance. The empirical results, based on a unique database of Thai firms, do not support the hypothesis that controlling shareholders expropriate corporate assets. In fact, the presence of controlling shareholders is associated with higher performance, when measured by accounting measures such as the ROA and the sales-asset ratio. Since most of the firms do not implement control mechanisms to separate voting and cash flow rights, the controlling shareholders might be self-constrained not to extract private benefits. Otherwise, they would internalize higher costs of expropriation from holding high stakes. The controlling shareholders' involvement in the management, however, has a negative effect on the performance. The negative effect is more pronounced when the controlling shareholder-and-manager's ownership is at the 25-50 percent. The evidence also reveals that family controlled firms display significantly higher performance. Foreign controlled firms as well as firms with more than one controlling shareholder also have higher ROA, relative to firms with no controlling shareholder.Ownership structure, Corporate Control, Agency costs, Corporate Value, Thailand

Business Groups in Thailand: Before and after the East Asian Financial Crisis

This paper investigates how business groups in Thailand had evolved since the 1950s. We argue that political connections and foreign capital among other factors were contributable to the emerging of Thai business groups. The business groups that owned banks developed fast during the late 1980s and the early 1990s until the financial deregulation, and the establishment of the Stock Exchange of Thailand, and the Bangkok International Banking Facilities. After that the groups that do not own banks have expanded rapidly. We find that the ownership and board structure of the listed firms that belong to the top 30 business groups were not affected by the crisis. Compared to the pre-crisis period, the leverage ratio for the business groups firms has increased while the profitability has declined during the post crisis of 1997-1999. Restructuring appears to work well among group firms since it has helped improved industry-adjusted operating performance of the firms.Business Group, Corporate Governance, Ownership Structure, Restructuring, East Asian Financial Crisis

Allocating Risk Across Pyramidal Tiers: Evidence from Thai Business Groups

This paper shows that pyramidal ownership can be used to control downside risk. The research setting is Thailand before and after the 1997 Asian crisis. The focus is on family business groups that owned banks. The results show that the controlling family pursues different investment strategies for banks across pyramidal tiers in order to mitigate the entire group risk. Lower tier banks are used to undertake risky loans, while upper tier banks carry out more profitable investments. After the crisis hit, upper tier banks survived and almost all lower tier banks went bankrupt. By letting lower tier banks fail, the controlling family was able to save the rest of the group's firms.Pyramids, Business groups, Family Firms, Banks, Corporate Governance, Emerging markets, Thailand

Big Business Owners and Politics: Investigating the Economic Incentives of Holding Top Office

This paper investigates the mechanisms that firms use to get state favors. We focus on a less well studied but common mechanism: business owners seeking election to top office. Using Thailand as a research setting, we find that business owners who rely on government concessions or are wealthier are more likely to run for top office. Once in power the market valuation of their firms increases dramatically. Surprisingly, the owners' political power does not change their firms' financing strategies. Instead, we show that business owners in top office use their policy decision powers to implement regulations and public policies favorable to their firms. Such policies hinder not only domestic competitors but also foreign investors. As a result, connected firms are able to seize more market share.Business groups, Corporate governance, Emerging economies, Family firms, Political connections

Pyramiding of Family-owned Banks in Emerging Markets

This paper analyzes family-owned banks in Thailand. Using the data before the financial crisis, we find that wealthy families extensively use pyramids to control a business empire which includes financial and non-financial firms. We analyze the entire family group structure and find that one-third of the banks were placed at the second tier near the apex and two-third of the banks were located at deeper tiers in the pyramids. The empirical results show that bottom tier banks have lower performance due to risky loans. This evidence is consistent with the view that when the controlling family maximizes growth and stability of the entire group, lower tier firms are assigned to undertake risky investment. This ownership setting can insulate the entire group from the adverse effect when the investment does not pay off because the family owns relatively low cash flow stake in lower tier firms.Family-owned banks, Pyramids, Business groups, Emerging markets

Silent Large Shareholders and Entrenched Bank Management: Evidence from the Banking Crisis in Japan

We investigate the cause of this banking crisis that has jeopardized the stability of the financial and economic system since the 1990s. Following Hanazaki and Horiuchi (2001), we argue that the deficiency of effective corporate governance of banks in Japan has caused inefficient management. Our focus here is the role of largest shareholders who happen to be banks and insurers. We argue that these large shareholders appear to collude or conspire with management instead of being tough monitors. Consequently, the management became entrenched. Our empirical results show that during the 1980s these "entrenched banks" extended more lending. Even after the collapse of the bubble in the 1990s, they did not dramatically undertake restructuring to cope with the accumulated bad loans.Corporate Governance, Ownership Structure, Managerial Entrenchment, Shareholders Activism

Did Families Lose or Gain Control after the East Asian Financial Crisis?

This paper investigates the ownership and control of Thai public firms in the period after the East Asian financial crisis, compared to those in the pre-crisis period. Using the comprehensive unique database of ownership and board structures, we find that the ownership and control appear to be more concentrated in the hands of controlling shareholders subsequent to the crisis. Interestingly, even though families remain the most prevalent owners of Thai firms and are still actively involved in the management after the financial crisis, their role as the controlling shareholder becomes less significant. In addition, our results show that direct shareholdings are most frequently used as a means of control in both periods. Pyramids and cross-shareholdings, however, are employed to the lesser extent following the crisis.Ownership, Controlling Shareholder, Corporate Governance, East Asian Financial Crisis, Thailand

Connected Lending: Thailand before the Financial Crisis

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.Agency Costs, Capital Structure, Corporate Governance, Crony Capital, Debt Maturity, East Asian Financial Crisis, Thailand

Crony Lending: Thailand before the Financial Crisis

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.