Government Subsidisation and Shareholder Wealth Impact: Evidence from Malaysia

Abstract

This paper investigates the shareholder wealth impact of government investment in listed companies (and by extension, government subsidisation of those companies), using data from Malaysia. We distinguish two overlapping categories of government-related investors: those whose principal mission relates to economic policy and those whose principal mission relates to social policy. The methodology entails Ordinary Least Squares regressions. There are two dependent variables measuring management success at generating shareholder wealth: an intrinsic value surrogate and return on equity. The final sample comprises 1732 company–year observations from the investigation period 2011–2014. The evidence indicates that companies subject to shareholder by a government-related investor with a social (economic) policy mission are more (less) successful at generating wealth than companies without any government shareholding at all. The findings indicate that for companies subject to ownership by government investors with a mission related to economic policy, government subsidies are wealth-enhancing, subject to diminishing marginal returns beyond a threshold level of government shareholding. The research design reflects adaptations to the Malaysian institutional setting via choice of control variables and usage of data from a leading Malaysian equity analyst.

“Empirical Corporate Finance: Opportunities and Challenges”—Editorial Synthesis of the Special Issue

“…Hence, the empirical findings in Sinnadurai et al (2021b) do not fully accord with the predictions of Sinnadurai and Devi (2022), emanating from the seminal Boycko et al (1996) analytical model. It is not uncommon for seminal analytical papers to make "straw man" predictions to catalyse the development of the subsequent empirical literature.…”

“…This would divert shareholders' resources from the most economically efficient destination (Gao and Yu 2020). A possible motivation for managerial overinvestment may be to extract shareholder wealth (García-Lara et al 2016), or to pursue "pet" projects of members of management (Sinnadurai et al 2021b).…”

“…The empirical results of Sinnadurai et al (2021b) suggest that the relation between the level of government shareholding and shareholder wealth depends upon the type of government-related investor. This paper distinguishes government investors that adopt a "buy and hold" strategy and implement public policy via the governance of the investee corporations, from government investors that actively manage their share portfolios with a view to distributing returns to section(s) of society targeted for assistance.…”

“…The remainder of the current paper is structured as follows. Section 2 discusses the aforementioned issues, with reference to the three Malaysian papers (Sinnadurai et al 2021b; Alyasa-Gan and Che-Yahya 2022; Sinnadurai and Devi 2022). Section 3 discusses opportunities and challenges, highlighted by Ernst (2022).…”

The Influence of Government Shareholding on Dividend Policy in Malaysia

“…"Grabbing hand" mechanisms, in Malaysia, may be facilitated by regulators being partially "captured" by powerful businessmen and politicians (Vithiatharan and Gomez 2014). This conclusion is supported by the recent occurrence of high-profile corporate scandals, including the Port Klang Free Zone Scandal, the National Feedlot Corporation Scandal, and the 1Malaysia Development Berhad scandal (Sinnadurai et al 2021).…”