Heterogeneous political connections and stock price crash risk: Evidence from Malaysia

Tee, Chwee Ming; Lee, Mei Yee; Majid, Abdul

doi:10.1016/j.jbef.2021.100552

Cited by 8 publications

(6 citation statements)

References 44 publications

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“…In most of the early studies on crash risk, scholars tend to explain crash risk from the perspective of investors' various views on how information asymmetry can affect stock prices (e.g., Campbell & Hentschel, 1992;Chen et al, 2001;Hong & Stein, 2003). However, in more recent studies, scholars have gradually extended the explanation of information asymmetry to a wider scope based on agency theoretical framework in exploiting various factors on crash risk such as: earning management (Hutton et al, 2009); aggressive tax avoidance (Kim et al, 2011a); corporate social responsibility (Kim et al, 2014); corporate governance (Tarkovska, 2017); religion (Callen & Fang, 2015); corporate philanthropy (Zhang et al, 2016); takeover protection (Bhargava et al, 2017); business strategy (Habib & Hasan, 2017), and political connection (Luo et al, 2016;Tee, 2019;Tee et al, 2021).…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

Corporate diversification and stock price crash risk: Do female directors matters? Evidence from Malaysia

Lee¹

2022

AAMJAF

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This study examines the relation between corporate diversification and stock price crash risk and whether female directors moderate this relation. Using a sample of Malaysian publicly listed firms based on 2010–2016 data, our study finds diversification mitigates crash risk but only for highly diversified firms. Our study also finds that the mitigating effect of diversification is more pronounced for firms with higher proportion of female directors in the board in which it is aligned with the notion of gender diversity in promoting good corporate governance. Our findings are beneficial to stock investors in managing the “tail risk” in stock prices of conglomerates/diversified firms.

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Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

Corporate diversification and stock price crash risk: Do female directors matters? Evidence from Malaysia

Lee¹

2022

AAMJAF

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“…Our additional results contribute to active monitoring theory by concluding that higher dedicated institutional investors' ownership reduces the risk of stock price crashes. Fourth, we extend a recent study of Tee et al (2021), who examine the likelihood of stock crashes for different types of politically connected firms in Malaysia, by emphasizing the crucial role of both internal and external governance tools, i.e. RC and institutional investors in predicting and mitigating the risk of stock price crash in financial sector.…”

Section: Jaee 133mentioning

confidence: 83%

“…This paper makes several contributions to the literature. First, while prior studies that examined the determinants of stock price crash risk have centered on institutional investors stability (Callen and Fang, 2013; Tee et al , 2021), real earnings management (Francis et al , 2016), accounting conservatism (Kim and Zhang, 2016), tax avoidance level (Kim et al , 2011b), short interest (Callen and Fang, 2015), stock liquidity (Chang et al , 2016), powerful CEO (Mamun et al , 2020), CEO age (Andreou et al , 2017), CEO overconfidence (Kim et al , 2016), inefficient governance (Andreou et al , 2016), related party transactions (Habib et al , 2021; Shen et al , 2014), political incentives (Piotroski et al , 2015), and managerial equity incentives (Kim et al , 2011a), the role of RC in deterring crash risks still remains an empirical question. To the best of our knowledge, this research is the first to explore the association between RCs and the stock price crash risk in the financial sector in Malaysia.…”

Section: Introductionmentioning

confidence: 99%

Risk committee and stock price crash risk in the Malaysian financial sector: the moderating role of institutional ownership

Al‐Dhamari

Nor

Farooque

et al. 2022

JAEE

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PurposeThe authors empirically investigate the impact of the existence of a stand-alone risk committee (RC) and its characteristics on the likelihood of stock price crash risk in listed financial firms on the Bursa Malaysia. The authors also test whether the effect of RC on crash risk is attenuating or amplifying by the level of institutional ownership.Design/methodology/approachThe authors use a principal components analysis (PCA) to aggregate and derive a factor score for risk committee characteristics (i.e. independence, qualification, and size) as a proxy for the effectiveness of RC. The study also employs two distinct stock price crash risk measurements to corroborate the findings and partition institutional ownership into dedicated and transient to examine the potential impact of institutional shareholding on RC-stock price crash risk association.FindingsRegression analysis reveals that only RC qualification has a significant negative impact on stock price crash risk. However, when RC characteristics are aggregated into one composite factor, the authors find that firms with effective RCs exhibit lower risk of stock price crash. The authors also find that firms with high level of institutional shareholdings and effective RCs are less likely to experience crash risk likelihood. The additional analyses indicate that the complementary moderating effect of institutional ownership on RC-crash risk nexus is likely to be driven by dedicated institutional ownership. The results are robust across two measures of stock price crash risk and regression specifications for a longer run window.Originality/valueThe study, to the best of the researchers' knowledge, is the first to provide evidence in an emerging market financial sector companies' perspective suggesting that effective RCs are individually and aggregately associated with lower stock price crash risk, which is further strengthened by dedicated institutional investors. These findings are unique and contribute to a small but growing body of literature documenting the need for effective RCs and specific institutional investors and their consequences of improvements in stock price crash risk environment. Results of our research in this area provide important insights to financial and capital market participants, investors, regulators, and policymakers in Malaysia.

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“…Relevant studies show that political connections can distort investment behaviour (Liu et al 2019), reduce investment efficiency (Li and Jin 2021), and weaken performance (Deng 2011) of enterprises. In addition, politically connected firms also face greater risk of stock price collapse (Tee et al 2021). Therefore, politically connected firms are more likely to appear as financial problems.…”

Section: Research Hypothesesmentioning

confidence: 99%

How do political connections affect the formation of zombie firms? Evidence from Chinese manufacturing listed enterprises

Shao

Chen

Liu

2022

Asian-Pac Economic Lit

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Zombie firms that rely on government subsidies and bank loans have seriously affected the healthy development of economies. This paper uses data from Chinese listed manufacturing enterprises from 2007 to 2017 to test and analyse the relationship between political connections and zombie enterprises. The study finds: (i) political connections are positively correlated with the 'zombification' of enterprises; (ii) credit subsidies play an intermediary role between political connections and 'zombification' of enterprises, with the acquisition of large credit subsidies the main path to the 'zombification' of politically connected enterprises; and (iii) firms that have political connections may use credit subsidies for inefficient over-investment. This study has value for other countries in clarifying the causes of zombie firms and preventing politically connected enterprises from becoming zombie firms.

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Heterogeneous political connections and stock price crash risk: Evidence from Malaysia

Cited by 8 publications

References 44 publications

Corporate diversification and stock price crash risk: Do female directors matters? Evidence from Malaysia

Corporate diversification and stock price crash risk: Do female directors matters? Evidence from Malaysia

Risk committee and stock price crash risk in the Malaysian financial sector: the moderating role of institutional ownership

How do political connections affect the formation of zombie firms? Evidence from Chinese manufacturing listed enterprises

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