Political connections, institutional investors monitoring and stock price synchronicity

Abstract

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.

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.…”

“…Compared to other countries in the East Asian region, Malaysia has one of the highest ownership concentrations (Fan & Wong, 2005), and a high level of institutional investors' shareholdings (Abdul Wahab et al, 2007). Second, institutional investors in Malaysia are subject to government roles and interference; the Malaysian government has an active and dominant ownership in the financial market through government-linked investment companies (GLIC) (Abdul Wahab et al, 2008;Gomez et al, 2018;Tee, 2017). As a result, the effect of government ownership on capital markets and firm governance cannot be ignored.…”

Effect of COVID-19 outbreak towards banking and finance industry

“…Others study like Tee (2017) suggested that regulators should increase their surveillance and monitoring effort into Malaysian companies. In addition, Malaysian companies should be transparent in their corporate dealings and auditors should strengthen their audit efforts in order to provide more reliable financial information.…”

CEO characteristics, accounting opacity and stock price synchronicity: Empirical evidence from German listed firms

“…Other studies have analyzed the effect of corporate governance on SPS (as Ntow‐Gyamfi, Bokpin, & Gemegah, ). Recently, other researchers examine the effect of different type of investors (foreign, political connection) on SPS (Tee, ; Vo, ). However, there is a dearth of information on the analyzing of the effect of accounting opacity on SPS.…”