Bank connections, corporate investment and crisis

Against the backdrop of a severe financial crisis and extensive restructuring of the financial sector, we investigate the evolution and determinants of connections between firms and banks, and the impact of bank connections on corporate investment. Our study examines Thai non-financial companies during 1995-2000, a period straddling the East Asian Financial Crisis of 1997-1998. Before the crisis, bank-connections are common and associated with significantly lower sensitivity of corporate investment to internal cash flow. After the crisis, and following substantial changes in bank ownership and governance due to financial-sector reforms and restructuring, far fewer firms are bank-connected and connections no longer affect investment-cash flow sensitivity.

► We investigate the determinants of connections between banks and Thai firms. ► We examine the impact of bank connections on firm investment. ► Before the East Asian Financial Crisis of 1997-1998, bank connections were common. ► Pre-crisis, connections led to lower sensitivity of firm investment to cash flow. ► After the crisis, connections no longer affect investment-cash flow sensitivity.