Bank relationships and their effects on firm performance around the Asian financial crisis: evidence from Taiwan

Financial Management (Financial Management Association),  Summer, 2004  by Robert C.W. Fok,  Yuan-Chen Chang,  Wan-Tuz Lee

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We thank the referee, the Editors, and seminar participants at Shippensburg University for helpful comments. Chang acknowledges financial support by project IEAS-2003-08-11 from the Institute of Economics at Academia Sinica, Taipei, Taiwan. We also thank Patricia Peat for excellent editorial assistance.

(1) For example, if a firm borrows an equal amount of funds from two banks with Banker rankings of 340 and 400, REP equals 370 [0,5(340) + 0.5(400)] initially, The final value of REP is 638 (1,008 - 370).

(2) Berger et al. (2001) use the proportion of loans over 60 days past due to proxy for banks' chance of delinquency. Information on non-performing loans is not available to us, so we use the loan loss provision ratio, defined as loan loss provision divided by total loans, as a proxy for bank financial distress.

(3) According to Detragiache et al. (2000), the median number of bank relationships in the US is 2.00.

(4) The inverse Mills ratio is the ratio of the standard normal density of the fitted value of the probit regression to the normal cumulative probability of the fitted value. The t-statistics for the inverse Mills ratios are 1.373 and 0.368 in the foreign-bank relationship equations during the pre-crisis and the crisis period, respectively, and 0.733 and -1.553 in the firm performance equations.

(5) To conserve space, we do not report the detailed results. The results are available upon request.

(6) In an alternative definition of financial distress, we define firms with interest coverage ratios of less than one as distress firms, and firms with interest coverage ratio greater than one as non-distressed firms. The alternative definition does not alter the main findings.

(7) Note that our result does not reflect the full picture of foreign bank lending pattern changes during the Asian finance crisis in Taiwan, and thus cannot be directly compared with the results in Dages, Goldberg, and Kinney (2000) and Goldberg (2001). Unlike Dages et al. (2000), we analyze firm data instead of bank data. As a result, we look only at commercial loans made by foreign banks to a sample of Taiwanese firms, not all foreign bank lending activities. Customer lending, mortgage lending, government lending, and interbank lending made by foreign banks in Taiwan are not considered.

References

Angelini, P., R. Di Salvo, and G. Ferri, 1998, "Availability and Cost of Credit for Small Businesses: Customer Relationships and Credit Cooperatives," Journal of Banking and Finance 22, 925-954.

Berger, A.N., L.F. Klapper, and F.F. Udell, 2001, "The Ability of Banks to Lend to Informationally Opaque Small Business," Journal of Banking and Finance 25, 2127-2167.

Best, R. and H. Zhang, 1993, "Alternative Information Sources and the Information Content of Bank Loans," Journal of Finance 48, 1507-1522.

Billett, M., M.J. Flannery, and J.A. Garfinkel, 1995, "The Effect of Lender Identity on a Borrowing Firm's Equity Return," Journal of Finance 50, 699-718.