Dynamic capital structure and political patronage: the case of Malaysia

Ebrahim, M. Shahid; Girma, Sourafel; Shah, M. Eskandar; Williams, Jonathan

Abstract

This paper investigates the effect of political patronage on firms' capital structure. The evidence is from Malaysia, a country characterised by relationship-capitalism, and covers 1988 to 2009. Using a system GMM estimator we find firms set leverage targets and adjust towards them following deviations at the rate of 28% per annum. Next, we construct a natural experiment and use a difference-in-differences model to investigate if the strategic financing decisions of politically patronised firms differ from non-connected firms after an exogenous shock caused by the 1997 Asian crisis. Our results unambiguously demonstrate a significant difference in the capital structure of patronised firms relative to non-connected firms following the exogenous shock but only for the crisis period 1998–2001. After 2002 the capital structures of patronised and non-connected firms are statistically equivalent.

Citation

Ebrahim, M. S., Girma, S., Shah, M. E., & Williams, J. (2014). Dynamic capital structure and political patronage: the case of Malaysia. International Review of Financial Analysis, 31, https://doi.org/10.1016/j.irfa.2013.11.004

• Journal Article Type: Article
• Acceptance Date: Nov 12, 2013
• Online Publication Date: Nov 19, 2013
• Publication Date: Jan 8, 2014
• Deposit Date: Oct 11, 2017
• Publicly Available Date: Oct 11, 2017
• Journal: International Review of Financial Analysis
• Print ISSN: 1057-5219
• Electronic ISSN: 1057-5219
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 31
• DOI: https://doi.org/10.1016/j.irfa.2013.11.004
• Keywords: Asian financial crisis, Capital structure, Political patronage
• Public URL: https://nottingham-repository.worktribe.com/output/722035
• Publisher URL: http://www.sciencedirect.com/science/article/pii/S1057521913001658?via%3Dihub