Institutional Investors’ Monitoring and Stock Price Crash Risk: Evidence from Politically Connected Firms

Abstract

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.

Institutional investor heterogeneity and analyst recommendation: Malaysian evidence

“…In Malaysia, the effectiveness of institutional investors as monitoring bodies has been recognised in previous studies. For example, the existence of institutional investor leads to improved earnings quality (Abdul Jalil & Abdul Rahman, 2010;Tee & Rasiah, 2020), improved stock price informativeness (Tee, 2017), lower risk of stock price crashes (Tee, 2019;Tee, Yee et al, 2018), attenuated cost of debt (Tee, 2018), demand for higher audit quality (Tee et al, 2017), and is associated with higher dividend payouts (Benjamin et al, 2016) which indicate effective monitoring. Therefore, sell-side analysts as information intermediaries should issue more favourable stock recommendations for the companies with higher institutional investor ownership.…”

The Impact of Sustainable Financial Data Governance, Political Connections, and Creative Accounting Practices on Organizational Outcomes

“…Fuchs, Bergmann, and Brusca [57] added that accrual accounting reforms on financial reporting is a prerequisite instrument for sound decisions. Pijper [28] added that the quality of financial and accounting reporting is a strong determinant for decision-making, and this chain has been expounded by Tee, Yee, and Chong [23], who argued that firms with strong political connections are likely to experience stock price crash risk or shocks. Politically connected firms are prone to use creative accounting practices, which is likely to reduce the quality of annual reports and firms with limited knowledge of their financial standings, and situations are more likely to make wrong decisions.…”

“…Existing research on political connections [14,[21][22][23], creative accounting practices [24][25][26], and the quality of financial reporting [12,24,27,28] mostly relies on secondary data, which largely does not have the appropriate information due to utilization of proxy variables. Consequently, secondary data has a high level of biasness and lack of control over data quality [29,30].…”

The effects of ownership structure, sub-optimal cash holdings and investment inefficiency on dividend policy: evidence from Indonesia

“…Allen et al (2000) argue that institutional investors have good abilities to monitor firm management since they have a substantial amount of stocks in the firm. Tee et al (2018) find that institutional ownership plays a major role in monitoring managers by reducing the positive association between politically connected firms and stock price crashes. The institutional investor can also force managers to impose a large penalty when the managers cut dividends (Leary and Michaely 2011).…”