Dynamic capital structure and political patronage: The case of Malaysia

M. Shahid Ebrahim (), Sourafel Girma, Mohamed Shah and Jonathan Williams

International Review of Financial Analysis, 2014, vol. 31, issue C, 117-128

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.

Keywords: Asian financial crisis; Capital structure; Political patronage (search for similar items in EconPapers)
JEL-codes: G01 G32 (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (33)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:31:y:2014:i:c:p:117-128

DOI: 10.1016/j.irfa.2013.11.004

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