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Dynamic capital structure and political patronage: The case of Malaysia

  • Ebrahim, M. Shahid
  • Girma, Sourafel
  • Shah, M. Eskandar
  • Williams, Jonathan

This paper investigates the effect of political patronage on firms' capital structure. The evidence is from Malaysia, a country characterised by relationship-capitalism, and covers 1988 to 2009. Using a system GMM estimator we find firms set leverage targets and adjust towards them following deviations at the rate of 28% per annum. Next, we construct a natural experiment and use a difference-in-differences model to investigate if the strategic financing decisions of politically patronised firms differ from non-connected firms after an exogenous shock caused by the 1997 Asian crisis. Our results unambiguously demonstrate a significant difference in the capital structure of patronised firms relative to non-connected firms following the exogenous shock but only for the crisis period 1998–2001. After 2002 the capital structures of patronised and non-connected firms are statistically equivalent.

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Article provided by Elsevier in its journal International Review of Financial Analysis.

Volume (Year): 31 (2014)
Issue (Month): C ()
Pages: 117-128

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Handle: RePEc:eee:finana:v:31:y:2014:i:c:p:117-128
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/620166

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