Purpose
The purpose of this paper is to examine the association between politically connected (POLCON) firms and stock price synchronicity, and whether this association can be attenuated by institutional investors.
Design/methodology/approach
This paper uses an ordinary least square regression model to examine the association between POLCON firms and stock price synchronicity; institutional ownership and stock price synchronicity; the moderating role of institutional ownership on the association between POLCON firms and stock price synchronicity; institutional domiciles and stock price synchronicity; and the moderating role of institutional domiciles on the association between POLCON firms and stock price synchronicity.
Findings
The result shows that POLCON firms are positively associated with stock price synchronicity. Further, the author also finds that institutional monitoring, through higher ownership by local institutional investors is associated with lower stock price synchronicity. In addition, this study documents evidence that institutional investors, particularly local institutional investors can improve stock price informativeness in POLCON firms.
Research limitations/implications
The results suggest that POLCON firms are plagued by severe agency problems, resulting in limited flow of firm-specific information to the capital markets. However, the author shows that POLCON firm’s agency problems can be attenuated through effective monitoring by institutional investors. Further, institutional domiciles are shown to be significantly associated with stock price synchronocity. However, effective monitoring is largely driven by local institutional investors, in line with the geographical proximity theory.
Practical implications
The results suggest that regulators should increase their surveillance and monitoring effort, particularly on firms with close ties to the government. In particular, POLCON firms should be required to be more transparent in their corporate dealings. Additionally, auditors should intensify their audit efforts on POLCON firm to provide more reliable financial information to minority shareholders, investors and analysts. Finally, institutional investors should be incentivized by the Malaysian Securities Commission, via, the code of governance to play an effective monitoring role in Malaysian firms.
Originality/value
This study reveals that POLCON firms’ severe agency problems can be alleviated by effective institutional monitoring. Further result identifies institutional domiciles as a significant factor in influencing monitoring effectiveness in POLCON firms. This paper provides insights into the dynamic interaction between political connections, institutional monitoring, firm governance and capital markets behavior of an emerging market.
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.
Purpose
The purpose of this paper is to examine the investment preference of various types of institutional investors in Malaysia, and its influence on firm valuation, operating performance and capital expenditure.
Design/methodology/approach
This study employs ordinary least squares model to examine: investment preference according to different types of institutional investors; the association between various types of institutional investors and firm valuation; the association between various types of institutional investors and firm performance; and the association between various types of institutional investors and capital expenditure.
Findings
The result shows that different types of institutional investors exhibit different investment preference. From the domiciles perspective, local institutional investors (LII) are found to be associated with higher Tobin’s Q, ROA and net profit margin. When viewed from business relationship perspective, “pressure-resistant” institutional investors (PRII) are positively associated with Tobin’s Q, ROA and net profit margin. Both LII and PRII are also associated with higher capital expenditure.
Originality/value
This study reveals the investment preferences of various types of institutional investors in an emerging market economy. The results show that institutional monitoring is associated with higher firm valuation, higher firm performance and higher capital expenditure. However, the effect is largely driven by local and PRII, particularly government-controlled institutional funds. These evidence suggest that different firm outcomes between emerging and advanced economy can be explained by variation in institutional setting.
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