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Political connections, institutional monitoring and the cost of debt: evidence from Malaysian firms

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  • Chwee Ming Tee

Abstract

Purpose - The purpose of this paper is to examine the main and joint effects of politically connected firms (PCFs) and institutional monitoring on the cost of debt. Design/methodology/approach - Based on a panel data set of Malaysian politically connected and non-politically connected listed firms from 2002 till 2015, the author performs regression analysis. To address the issue of self-selection, thePCFs’ equation is estimated, following Lennoxet al.(2012) and Heckman (1979). Findings - This paper finds thatPCFsare associated with higher cost of debt. However, the positive association betweenPCFsand the cost of debt is attenuated by higher institutional ownership (IO). Further test reveals that monitoring by institutional investors is heterogeneous from the perspective of domicile. Local institutional investors are associated with lower cost of debt, particularly inPCFs, while foreign institutional investors are associated with higher cost of debt. Originality/value - The author shows that firm outcome, i.e. cost of debt in emerging markets can differ from advanced markets due to different institutional setting. Additionally, different types of political ties can produce different firm outcomes: GLCs are associated with lower cost of debt as opposed to connected firms based on personal ties. However, agency problems inPCFscan be alleviated through effective institutional monitoring. Consistent with geographical proximity theory, local institutional investors play a more effective monitoring role in Malaysian listed firms, thus lowering cost of debt. Overall, the results contribute to deeper understanding on variation in firm outcomes between emerging and advanced markets.

Suggested Citation

  • Chwee Ming Tee, 2018. "Political connections, institutional monitoring and the cost of debt: evidence from Malaysian firms," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 14(2), pages 210-229, January.
    • Handle: RePEc:eme:ijmfpp:ijmf-07-2017-0143
    DOI: 10.1108/IJMF-07-2017-0143
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    Citations

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    Cited by:

    1. Tee, Chwee-Ming & Wong, Wai-Yan & Hooy, Chee-Wooi, 2022. "Government power and the value of political connections: Evidence from Covid-19 economic lockdowns," Finance Research Letters, Elsevier, vol. 47(PB).
    2. Khaw, Karren Lee-Hwei & Zainudin, Rozaimah & Rashid, Rasidah Mohd, 2019. "Cost of debt financing: Does political connection matter?," Emerging Markets Review, Elsevier, vol. 41(C).
    3. Phan, Dinh Hoang Bach & Tee, Chwee Ming & Tran, Vuong Thao, 2020. "Do different types of political connections affect corporate investments? Evidence from Malaysia," Emerging Markets Review, Elsevier, vol. 42(C).
    4. Tee, Chwee Ming, 2020. "Political connections and income smoothing: Evidence of institutional investors’ monitoring in Malaysia," Journal of Multinational Financial Management, Elsevier, vol. 55(C).
    5. Wan Nordin Wan-Hussin & Ameen Qasem & Norhani Aripin & Mohd Shazwan Mohd Ariffin, 2021. "Corporate Responsibility Disclosure, Information Environment and Analysts’ Recommendations: Evidence from Malaysia," Sustainability, MDPI, vol. 13(6), pages 1-27, March.
    6. Chia, Yee-Ee & Lim, Kian-Ping & Goh, Kim-Leng, 2020. "Liquidity and firm value in an emerging market: Nonlinearity, political connections and corporate ownership," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    7. Tee, Chwee Ming & Pak, Mei Sen & Lee, Mei Yee & Majid, Abdul, 2021. "CEO generational differences, risk taking and political connections: Evidence from Malaysian firms," Journal of Behavioral and Experimental Finance, Elsevier, vol. 31(C).
    8. Vidya Sukumara Panicker & Rajesh Srinivas Upadhyayula & Sumit Mitra, 2023. "Lender representatives on board of directors and internationalization in firms: an institutionalized agency perspective," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 27(1), pages 75-98, March.

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