Dynamic capital structure and political patronage: the case of Malaysia
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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.
Asian financial crisis , Capital structural , Political patronage
Ebrahim, Muhammed-Shahid and Girmab, Sourafel and Mohd Rasid, Mohamed Eskandar Shah and William, Jonathan. (2014). Dynamic capital structure and political patronage: the case of Malaysia. International Review of Financial Analysis, 31, pp. 117–128.