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Dynamic capital structure and political patronage: the case of Malaysia

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

Authors

M. Shahid Ebrahim

SOURAFEL GIRMA sourafel.girma@nottingham.ac.uk
Professor of Industrial Economics

M. Eskandar Shah

Jonathan Williams



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.

Journal Article Type Article
Publication Date Jan 8, 2014
Journal International Review of Financial Analysis
Print ISSN 1057-5219
Electronic ISSN 1057-5219
Publisher Elsevier
Peer Reviewed Peer Reviewed
Volume 31
APA6 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
DOI https://doi.org/10.1016/j.irfa.2013.11.004
Keywords Asian financial crisis, Capital structure, Political patronage
Publisher URL http://www.sciencedirect.com/science/article/pii/S1057521913001658?via%3Dihub
Copyright Statement Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0

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Copyright Statement
Copyright information regarding this work can be found at the following address: http://creativecommons.org/licenses/by-nc-nd/4.0





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