Dynamic capital structure and political patronage: The case of Malaysia

Ebrahim, M.S.; Girma, S.; Shah, M.E.; Williams, J.

doi:10.1016/j.irfa.2013.11.004

Dynamic capital structure and political patronage: The case of Malaysia

Ebrahim, M.S.; Girma, S.; Shah, M.E.; Williams, J.

Authors

Professor Muhammed Ebrahim m.s.ebrahim@durham.ac.uk
Professor

S. Girma

M.E. Shah

J. 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.

Citation

Ebrahim, M., Girma, S., Shah, M., & Williams, J. (2014). Dynamic capital structure and political patronage: The case of Malaysia. International Review of Financial Analysis, 31, 117-128. 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 1, 2014
Deposit Date	Apr 15, 2015
Publicly Available Date	Apr 20, 2015
Journal	International Review of Financial Analysis
Print ISSN	1057-5219
Publisher	Elsevier
Peer Reviewed	Peer Reviewed
Volume	31
Pages	117-128
DOI	https://doi.org/10.1016/j.irfa.2013.11.004
Keywords	Asian financial crisis, Capital structure, Political patronage.
Public URL	https://durham-repository.worktribe.com/output/1431076

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Copyright Statement
NOTICE: this is the author’s version of a work that was accepted for publication in International Review of Financial Analysis. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in International Review of Financial Analysis, 31, January 2014, 10.1016/j.irfa.2013.11.004.