Political connections, institutional investors and dividend payouts in Malaysia

Abstract

Purpose -This study examines the agency problem of expropriation using dividends in politically connected firms and the relevance of institutional investors in limiting this problem.The growing presence of institutional investors offers a unique opportunity to test their roles in politically connected firms and its importance in the context of dividend payouts and expropriation.Design/methodology/approach-This study employs the Tobit regression to test the association between political connection, institutional investors and dividend payouts. Results are also robust to the three-stage-least squares regressions method.Findings -Based on a random sample of 2458 Malaysian firms-year observations for the period of 2004-2009. The results reveal that politically connected firms have an inclination to pay lower dividends, while institutional ownership are associated with higher dividend payouts. Furthermore, our findings reveal that higher levels of institutional ownership moderates the negative relationship between politically connected firms and dividends.Implications-Findings has an important implication to regulators as it suggests that the institutional investors can influence the dividends payout in politically connected firms through active monitoring and thus alleviating agency problems. This also provides a positive feedback on the regulators' governance initiatives that quest to strengthen the roles of institutional investors.Originality/value -This study is the first to examine the effectiveness of the monitoring role of institutional investors in the context of expropriation by politically connected firms from the perspective of dividend payouts. JEL Classification: G35, G30, G23

Institutional investor heterogeneity and analyst recommendation: Malaysian evidence

“…Corporate ownership in the Malaysian stock market can be divided by ethnicity: Malay, Chinese, Indian and other small minority groups (Abdul Wahab et al, 2015). According to Ball et al (2003), almost 69% of the market capitalisation is dominated by the Chinese group, while Bumiputera shareholdings stood at 21.9% in 2008 even after the implementation of the New Economic Policy (NEP) in 1970, which aimed to increase Bumiputera 2 shareholdings in the capital market by various means (Benjamin et al, 2016;How et al, 2014). Various institutional funds were set up by the Malaysian government to increase the Bumiputera shareholdings from nearly zero in 1970 to at least 30% (Tee, Foo et al, 2018).…”

“…Since the formation of the NEP in 1970, local institutional investors have provided government with the vehicle to support and protect the economic interests of Bumiputera investors (How et al, 2014). The five largest public institutional investors are Employees Provident Fund (EPF), Lembaga Tabung Angkatan Tentera (LTAT), Lembaga Tabung Haji (LTH), Permodalan Nasional Berhad (PNB) and Social Security Organisation (SOCSO) (Benjamin et al, 2016). These institutions are run by Bumiputera who typically hold the position of chair of the board of directors (How et al, 2014).…”

“…These institutions are run by Bumiputera who typically hold the position of chair of the board of directors (How et al, 2014). The Board and Investment Panels of these institutions are appointed by and report directly to the Ministry of Finance (Benjamin et al, 2016;Norhashim & Abdul Aziz, 2005).…”

“…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.…”

“…These institutions are run by Bumiputera who typically hold the position of chair of the board of directors. Appointments to the Investment Advisory Board for these institutions are politically motivated (Norhashim & Abdul Aziz, 2005) as the Board reports directly to the Ministry of Finance (Benjamin et al, 2016). The investments of these institutional investors are heavily biased towards Bumiputera-run corporations (Norhashim & Abdul Aziz, 2005).…”