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Institutional Investors’ Monitoring and Stock Price Crash Risk: Evidence from Politically Connected Firms

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  • Chwee Ming Tee

    (School of Business, Department of Accounting and Finance, Monash University Malaysian Campus, Jalan Lagoon Selatan, 46150 Sunway, Selangor, Malaysia)

  • Angelina Seow Voon Yee

    (Nottingham University Business School, University of Nottingham Malaysia Campus, Jalan Broga, 43500 Semenyih, Selangor, Malaysia)

  • Aik Lee Chong

    (Faculty of Business and Law, International University of Malaya-Wales, Jalan Tun Ismail, 50480 Kuala Lumpur, Malaysia)

Abstract

Motivated by recent studies on political connections and stock price crash risk, this study investigates whether there is an association between politically connected (POLCON) firms and stock price crash risk. Further, we examine whether institutional investors’ ownership can moderate this association. Using a dataset of Malaysian firms for the period 2002–2012, we show that POLCON firms are associated with higher risk of stock price crashes. However, the positive association between POLCON and stock crashes is attenuated by higher institutional ownership, implying effective monitoring. Finally, we find that only local institutional investors can significantly mitigate the positive association between POLCON firms and stock price crash risk. This suggests that different types of institutional investors can produce different monitoring outcomes in POLCON firms.

Suggested Citation

  • Chwee Ming Tee & Angelina Seow Voon Yee & Aik Lee Chong, 2018. "Institutional Investors’ Monitoring and Stock Price Crash Risk: Evidence from Politically Connected Firms," Review of Pacific Basin Financial Markets and Policies (RPBFMP), World Scientific Publishing Co. Pte. Ltd., vol. 21(04), pages 1-35, December.
    • Handle: RePEc:wsi:rpbfmp:v:21:y:2018:i:04:n:s0219091518500285
    DOI: 10.1142/S0219091518500285
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