Companies that have political connections in Malaysia are always interesting to discuss because according to research of Faccio, Malaysia was ranked second for the number of companies in capital market with political connections. For this reason, this research intends to investigate whether there is a relationship between a company with political connections and the cost of corporate equity, which in turn further studied whether corporate governance factors bridge the connection. The cost of equity is considered in this study because the cost of equity is the discount rate applied to future cash flows so it is expected that the company can determine the current stock price. Furthermore, according to the previous literature, the cost of equity can also influence investment and financing decisions.
This research also considers the corporate governance, whether it can reduce agency problems which can reduce the cost of corporate equity. This is because the main purpose of corporate governance is to oversee management activities in order to make decisions that guarantee agreement between shareholders and debt holders. The rest of Chen’s research supports the previous reason because it was found that the level of corporate governance has a negative impact on the cost of equity capital, especially in countries where the legal protection provisions for investors are relatively weak.
Companies that have political connections can bring some benefits to the company, due to financial privileges such as political bailouts in times of financial difficulties. With government support, it is even possible to impose tariffs on competitors and reduce regulatory requirements. Thus, companies with political connections will have lower equity costs compared to companies that do not have political connections.
In terms of board size, the bigger the size, the higher the cost of equity will be. This is supported by research that a large number of boards of directors tends to function less effectively in decision making. But in terms of independent board size, the greater the number the better it can improve company performance. This research assumes that despite the negative relationship between political connections and the cost of equity, the relationship will be weaker for companies with better governance mechanisms.
The research analysis used a total of 2,223 companies from 2000 to 2009 as samples. This samples were generated from the annual report of 978 companies listed in Bursa Malaysia. The analysis technique is regression.
The results of the analysis found that companies with political connections have a negative relationship with equity costs, which means these companies enjoy lower equity costs than companies without political connections. Furthermore, this study did not find any connection between the independence board and the cost of equity. Similarly, the results of research for board size, company size and company risk are also not consistent with previous studies.
Author: Iman Harymawan, Ph.D. Details of this research avaiable at: www.ijicc.net
Wahab, E.A. A., Agustia, D., Azmi, N. A., Harymawan, I., Ramli, R., & Zakaria, N.B. (2020). Political Connections, Corporate Governance, and the Cost of Equity in Malaysia. http://dx.doi.org/10.1108/02686901111129562
