Political connections, ownership structure, and financial institution failure

Thailand was at the origin of the Asian financial crisis of 1997. Our research seeks to understand what economic and political factors contributed to the collapses of Thailand's financial institutions during the crisis. The distinctive feature of our model is that it incorporates variables for ownership structure as well as political connections in addition to the traditional financial variables. Foreign-owned financial institutions were less likely to fail. The probability of failure is also inversely related to the control rights of the largest shareholder. Finally, there is evidence of the too-big-to-fail (TBTF) policy. Our results are important because they demonstrate that traditional models, especially when applied to emerging economies, can be enhanced by incorporating variables related to ownership structure as well as political connections.

► We explore the 1997 Asian Financial Crisis, which had devastating effects throughout East Asia. ► Our study examines factors that contributed to the collapses of financial institutions in Thailand, where the Crisis originated. ► We find that foreign-owned financial institutions were less likely to fail. ► The probability of failure is also inversely related to the control rights of the largest shareholder.