Political patronage and firm performance: Further evidence from Malaysia

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Abstract

This paper investigates the characteristics, performance, and share price reaction of politically connected firms versus a control sample of independent firms in Malaysia. Politically connected firms had higher level of leverage, lower profitability, and lower sales to profitability, and paid lower taxes and lower dividends compared to independent firms. Their share prices increase with the announcement of favorable political events. In terms of performance, the active rent-seeking activities in return for preferential treatment produce comparable performance to independent firms during an economic upturn. However, their performance deteriorates more than independent firms during an economic downturn. The percentage of ownership of government institutions in politically connected firms is also much lower, and these firms use more Tier 1 auditors than the independent firms. Overall, the findings are consistent with expectations and evidence from similar studies in developed and developing economies. © 2012 Wiley Periodicals, Inc.

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