Proceedings of the Australian Academy of Business and Social Sciences Conference 2014
(in partnership with The Journal of Developing Areas)
ISBN 978-0-9925622-0-5
ESTIMATING THE VALUE OF POLITICAL CONNECTION IN MALAYSIA’S TOP
RICHEST TYCOON COMPANIES
Wan Sallha,Yusoff
Universiti Malaysia Perlis, Malaysia
Mohd Fairuz Md. Salleh
Azlina Ahmad
Fazli Idris
Universiti Kebangsaan Malaysia, Malaysia
ABSTRACT
This paper investigates the effect of direct political connection on firm value of Malaysia‟s top richest tycoon companies. We
hypothesize that wealthiest people are likely to hedge their political bets and poorly related to direct political connection
which as a results, hidden the direct political effect on firm value. The empirical evidence lends credence to this notion.
Specifically, we find that in the case of majority share is controlled by „peripheral capitalism‟, government ownership and
politician on board have positive effect on firm value. However the magnitude of the relationship is small which signifies a
possibility of indirect political connection involved in Malaysia‟s Top Richest Tycoon Companies. Our results aptly fit into
the ongoing debate on estimating the value of political connection.
JEL Classifications: P1, L1, M400
Keywords: Top Tycoon, Business elites, political connection, firm value, Intellectual Capital
Corresponding Author’s Email Address: [email protected]
INTRODUCTION
The combined wealth of top richest tycoons in Malaysia has been the focus of considerable interest since 2002,
when it was first listed in the Malaysian Business Magazine annual „Malaysia‟s 40 richest‟ lists and the Forbes
Magazine annual ranking of the world‟s billionaires. The combined wealth of Malaysia‟s 40 richest individuals
rose 11.7% from RM194.86 billion in 2013 to RM217.82 billion in 2014 (Malaysian Business, 2014). The
wealth figures were calculated based on the individuals‟ reported personal stakes in listed companies and private
holdings.
Studies that examine trend of the top richest tycoons‟ wealth and the factors affecting it seems to be
promptly and significant. This is because the steady increase of their wealth can be attributed to the share market
performance and price inflation, given that their wealth is largely based on their shareholdings (Lever-Tracy,
2002). It also reflects the performance of the tycoons‟ companies and Malaysia‟s positive economic growth over
the past 12 years. Nevertheless, from the 81 tycoons that have joined the 40 Richest Malaysian‟s list, more than
80% could not manage to remain on the list continuously (Malaysian Business, 2014). The increase percentage
of individual wealth also dropped and fluctuated (see Table 1.1). The dropping trend of their total wealth reflects
Malaysian capital market, which in turn may generate the perception of higher risk among investors.
TABLE 1.1: THE COMBINATION OF INDIVIDUAL WEALTH FROM TOP 40 RICHEST MEN IN
MALAYSIA (2008-2014)
Year
As at
2008
2009
2010
2011
2012
2013
2014
Jan 18
Jan 15
Jan 15
Jan 21
Jan 20
Jan 18
Jan 18
Total wealth
RM (billion)
171.90
96.30
156.70
206.37
193.20
194.86
217.82
% Increase
- 44%
+ 63%
+ 32%
- 6.4%
+0.86%
+ 11.7%
Source: Malaysian Business Magazine (several issues).
Recent studies reported financial risks as one of the main factors to the fluctuation of their total wealth (All
Business Daily, 2012). However, to our knowledge, there is no empirical study that has documented the value of
political control in business. Whereas the closed link between politician and business elites has long been
recognized in financial studies (Goldman et al., 2009, Johnson and Mitton, 2003, Gomez and Jomo, 1997,
Shleifer and Vishny, 1994). Thus, our empirical study fills this gap in the literature and provides strong evidence
Proceedings of the Australian Academy of Business and Social Sciences Conference 2014
(in partnership with The Journal of Developing Areas)
ISBN 978-0-9925622-0-5
of an important fundamental link between politics and business. This study highlights the role of agency costs in
explaining direct political control. More precisely, we examine the effect of direct political connection on firm
value.
In examining the effect, we offer two competing hypotheses. First, the “Network Hypothesis” which
proposes that political connection signals business network. The involvement of key government servants on
board, politician on board and government ownership may provide better patron-client relations between the
government and businesses (Faccio, 2006). If this is the case, they should help attenuate agency costs and
discourage value-reducing that is motivated by agency conflicts. Second, the “Wealthiest Hypothesis”, which on
the other hand, postulates that firms that are controlled by wealthiest people are likely hedge their political bets
and poorly related to direct political connection, which in turn hidden the direct political effect on firm value.
Our results support the Wealthiest Hypothesis. We shows that even though 83% of the sample firms are
direct political connected firms, only government ownership, one out of three political connection variables
(namely key government servants on board, politicians on board and government ownership) display positive
and significant relationship with firm‟s financial value at 10% significant level. In other words, firms that are
controlled by wealthiest people seem to hedge their political bets and are poorly related to direct political
connection. The results appear to be robust across several measures of political connection variables.
Furthermore, since we contend that direct political connection is poorly related to top richest tycoon companies,
we conduct an additional analysis that takes into account non-financial value of firm. Using value added
intellectual coefficient (VAIC) developed by Pulic (1998), the results indicate that only politician on board
exhibits positive relationship and the relationship is highly significant at 5% level. The results of this study shed
new light on this area of research with regards to indirect political connection, as this study has shown poor
relationship between direct political connection and firm value in Malaysian business elite scenario.
The remainder of this paper is organized as follows. Section 2 reviews the literature and presents the
hypotheses. Section 3 delineates the sample selection procedure and describes the empirical data. Section 4
presents and discusses the empirical results. Finally, Section 5 offers the concluding remarks.
LITERATURE REVIEW AND HYPOTHESIS DEVELOPMENT
In Malaysia, tycoons are only one part of entrepreneurs but they are the most visible and far from the most
important people (Lever-Tracy, 2002). Although they are small in figure but they usually control more than one
listed companies in the country. They are not only the predominant role models of the country but may influence
the perception of foreign direct investors. For example, Robert Kuok, the most Malaysian richest man, has full
controls in more than 5 listed companies and partial control in palm oil, shipping and properties industries in
Malaysia. Similarly, Ananda Krishnan who maintains his position as the country's second-richest man on the
Malaysia‟s 40 richest list, controls telecoms industries in Malaysia.
To-date, there is a paucity of empirical research on the extent to which richest tycoons create value. LeverTracy (2002) for example, study the effects of family control on Chinese tycoon companies‟ performance.
Meanwhile, All Business Daily (2012) reported that financial crisis negatively influence tycoon total wealth. In
spite of the considerable breadth and depth of this literature, to our knowledge there is no empirical study that
has documented on the effect of tycoon‟s political ties in business. Thus, this study addresses two issues. First,
whether political connection is value destroying. The second issue is about the relationship between the
characteristics of political connection firms and the value of richest tycoons‟ companies.
The findings of the first question are mixed. Previous studies that relate some measures of political
connection to firm value found it to be value destroying giving rise to agency cost (e.g Mitchell and Joseph,
2010, Johnson and Mitton, 2003, Dalgic and Long, 2006). Most of the existing literature which relates political
connection with cronyism, corruption and nepotism, documented that political connection increased agency cost.
For examples, the presence of politicians as government representatives on the board of directors can create
double agency problems involving self-interested behaviour by both managers and politicians (Wong, 2004).
There can be negotiations or bargaining processes between politicians and managers in order to maximise their
own self-interest (Salleh and Ahmad, 2012).
On the other hand, there are studies that address the first issue by examining the effects of political benefits
(Li et al., 2008, Ang and Ding, 2006, Chang and Wong, 2004) which suggests that political connection is
positively related to firm value. In relation to corporate governance, companies with government intervention
(such as politician on board and government ownership) are better governed (Ang and Ding, 2006). More
specifically, these companies are not only under the watchful eyes of the public (namely investors and
shareholders), but also the government. As a consequence, management of these companies is more conscious of
the importance of maximizing shareholders‟ value over self-interest (Lau and Tong, 2008). However, evidence
of the value of political connection continues to be reported in finance and economic literature (Bliss and Gul,
2012, Wu et al., 2012, Yeh et al., 2013).
Proceedings of the Australian Academy of Business and Social Sciences Conference 2014
(in partnership with The Journal of Developing Areas)
ISBN 978-0-9925622-0-5
The second question is concerned with the characteristic of political connection. Using Malaysian setting,
most researchers agreed that the introduction of new economic policy (NEP) marked as an important turning
point in Malaysian socio-economic, politics and corporate landscape (Bliss and Gul, 2012, Gul, 2006, Fraser et
al., 2006, Mitchell and Joseph, 2010). As Gul (2006) suggested, the NEP opens the door for crony capitalism
among Malays politics, state ownership and government ownership. In order to gain government patronage, most
of the Chinese business elites (predominant controlled economy) cultivate ties with Malays political elites. The
Chinese capitalists began to recruit Malay politicians, politically influential Malays and Malay ex-government
servants as company directors (Gomez, 1999). Meanwhile, Malaysian government exerts as a significant
influence over the corporate sector through listing restrictions, direct equity ownership of listed companies,
control of the banking sector, and through government-sponsored institutional investors (Jomo and Gomez,
2000).
Besides the direct involvement of government and politicians in business, informal ties between companies
and politicians may represent another type of political patronage in a “relationship-based” capitalist system such
as that of Malaysia (Fraser et al., 2006). According to Fraser et al. (2006), in order to accumulate wealth, both
Chinese businessmen and the Malays‟ political elite find the informal ties are mutually lucrative. Some Chinese
capitalists have been known to finance ambitious politicians as a means of gaining access to government
patronage (Fraser et al., 2006). Concerning the intimate relationship based system in Malaysia, the characteristic
of political connection can be categorized into direct and indirect political connection. Whether or not one of
these political characteristics are related to agency problem or continue as political benefits, are still debatable
issues.
Hypothesis Development
It is our contention that political connection may affect agency problem (which, in turn, has an impact on agency
costs) and, hence, influence firm value. We offer two opposing hypotheses, the Network Hypothesis and the
Wealthiest Hypothesis.
The Network Hypothesis
This hypothesis is based on the idea that political ties signify business networking. Companies that have political
connection are easy to get government patronage such as better access to government projects, easy access to
finance and more confidence in the legal system. To gain these benefits, business elites cultivate ties with
political elites. They recruit politicians and ex-government servants as their company directors (Gomez, 1999).
At the same time, in order to allocate government funds and to control major decisions on stake (e.g. contract
awards, strategy, restructuring, financing, acquisition and divestments) Malaysian government does have
ownership in some listed companies (Ng and Yeoh, 2012). Nevertheless, previous researchers found that the
involvement of direct political connection (such as through key government servant/s on board, politician/s on
board and government ownership) can create principal-principal conflicts of agency (i.e. conflicts between
majority/controlling shareholders and their respective outside minority shareholders), which in turn may
influence firm value (Mitchell and Joseph, 2010, Johnson and Mitton, 2003, Dalgic and Long, 2006). Based on
previous mixed results, this hypothesis predicts that richest tycoon companies that have direct political
connection incur principal-principal conflicts of agency, resulting influence on firm value. By separating direct
political connection into three proxies, namely, key government servant/s on board, politician/s on board and
government ownership, political connection is expected to provide evidence that firm value is affected positively
by marginal political benefit and negatively by marginal political cost.
To understand the simultaneous linkage between political connection and firm value in richest tycoon
companies, we develop our null hypothesis based on the theoretical work of Gomez (2009) who stated that in the
case of corporate Malaysia history, richest tycoon companies such as Genting, YTL Corp and Tanjong have
received marginal political benefits from the state because it enhances state-generated rents productively.
Therefore, by considering the financial and non-financial value of the firm we hypothesize the following:
H1 political connection is associated with higher financial value of the firm.
H2 political connection is associated with higher non-financial value of the firm.
The Wealthiest Hypothesis
This hypothesis is predicated on the view that wealthiest people who matured as a „peripheral capitalism‟, (self
regulating entities depending on their own networks and institutions) usually involve in transnational business
relationships in the global economy and carries no implications about national identity (Lever-Tracy, 2002).
Proceedings of the Australian Academy of Business and Social Sciences Conference 2014
(in partnership with The Journal of Developing Areas)
ISBN 978-0-9925622-0-5
They involve with high ranking political elites and are likely hedge their political bets in favor of a political
outcome that ensures their continued access to economic power and wealth (Abboud, 2013). This shows that
their direct political connection provides low correlation with businesses performance. Therefore, this hypothesis
predicts that firms that are controlled by wealthiest people are likely hedge their political bets and poorly
correlated with direct political connection, which in turn hidden the direct political effect on firm value.
Specifically, the following hypotheses are developed:
H3 There is a low correlation between direct political connection and financial value of the richest tycoon
companies.
H4 There is a low correlation between direct political connection and non-financial value of the richest tycoon
companies.
DATA AND METHODOLOGY
Data Selection
The sample of this study consists of Malaysia‟s top 40 richest tycoon public listed companies active during the
period of 2009 to 2012. The listed of Malaysia‟s top 40 richest tycoon was gathered from Malaysian Business
Magazine annual „Malaysia‟s 40 richest‟ lists and some additional information was taken from Forbes Magazine
annual ranking of the world‟s billionaires. The sample chosen is in line with their wealth assessment, which is
based on the value of their stakes in listed companies. Meanwhile, the period is corresponding to a drastic
change in the Malaysian political map after the 12th General Elections in 2008, which marked as the first time
that the coalition did not win a two-thirds supermajority in Malaysian Parliament The two-third of supermajority
is important to pass amendments to the Malaysian constitution.
From the sample, we excluded companies from the financial services industry because this industry is
subject to different regulations as compared to those in other industries. This procedure generates the total of 264
year observations (66 companies over the period of 4 years with complete data). Table 3.1 illustrates the sample
distribution by industries.
TABLE 3.1: NUMBER OF OBSERVATION BY INDUSTRIES
INDUSTRIES
Construction
COMPANIES
overall
TOTAL COMPANIES
16
with political connection
16
without political connection
0
Consumer
Hotel
28
4
20
4
8
0
Industrial product
IPC
52
8
38
8
14
0
Plantation
32
26
6
Properties
36
27
9
Technologies
4
4
0
Trading & services
84
75
9
Total
264
218
46
TOTAL YEAR OBSERVATIONS
264
Measures of Dependence Variables
In our study, the firm value is determined using two proxies; the first proxy is Tobin‟s Q which is used to
measure financial value of the firm. The second proxy is Value Added Intellectual Coefficient (VAIC) which is
used to measured non-financial value of the firm. The first measurement, Tobin‟s Q, is calculated based on
Chung and Pruitt (1994). The calculation is as follows:
Tobin‟s Q = MVE + PS + DEBT
(3.1)
TA
Where; MVE is the market value of equity computed as price per share multiplied by the number of
common shares outstanding, PS is the liquidating value of preferred stock, DEBT is the value of short-term
liabilities net of short-term assets plus the book value of long-term debt, and TA is the book value of total assets.
As for the second proxy, Value Added Intellectual Coefficient (VAIC), we use the methodology developed
by Pulic (1998).
VAIC is a composite sum of three indicators formally termed as follows:
Proceedings of the Australian Academy of Business and Social Sciences Conference 2014
(in partnership with The Journal of Developing Areas)
ISBN 978-0-9925622-0-5
Capital Employed Efficiency (CEE) – indicator of Value added efficiency of capital employed
Human Capital Efficiency (HCE) – indicator of Value added efficiency of human capital
Structural Capital Efficiency (SCE) – indicator of Value added efficiency of structural capital.
VAIC is represented by Equation 3.2:
VAIC = CEE + HCE + SCE
(3.2)
Where,
VAIC = ICE + CEE
ICE = HCE + SCE
HCE = Value added (VA) / Human capital (HC)
SCE = Structural Capital (SC) / Value added (VA)
CEE = Value added (VA) / Capital employed (CE)
VA = operating profit (OP) + Employee cost (EC) + Depreciation (D) + Amortization (A)
HC = total investment for salary and wages for firm i
SC = VA – HC
CE = book value of the net assets for firm i
It is important to note that even though the term VAIC stands for value added intellectual coefficient, it
actually represents the value-added efficiency of the firm‟s total resources, and not just the intellectual resources.
It is used as an alternate measure of firm value in this study.
Measures of Direct Political Connection
Political connection is defined in three proxies as follows:
1. Key government servant/s on board (GSBOD) is measured based on the number of key government
servant/s on board divided by total numbers of directors on board. Government servant/s is referred to
as any individuals that held or previously held the highest position at any government agencies
2. Politician/s on Board (PARLBORD) is measured based on the number of politician on board divided by
total numbers of directors on board. Politician/s is referred as member/s or ex-member/s of parliament
or state assembly.
3. Government ownership (GWON) is referred to the percentage of government ownership held by
Government Link Corporation (GLCs) (i.e. Government Link Investment Companies and MOF
(Incorporation) Companies) and non-Government Link Corporation)
Control Variables
To control the relationship between political connection and financial value of the firm, we include firm size
(logarithm of total assets), profitability (EBIT/total assets) and leverage (total debt/total assets). These firm
characteristics are used because they have been widely used in several studies, when measuring financial value
of firm (e.g. Berger and Ofek, 1995, Brick and Chidambaran, 2010 and Abidin et al., 2009). Additionally, we
control for shareholders ownership and board control, which are the richest men‟s ownership and total number of
directors on board.
Finally, to produce precise results, it is important to use a different control variable to control the
relationship between political connection and VAIC. For firm characteristics, following (Abidin et al., 2009,
Chang and Birkett, 2004 and Ståhle et al., 2011), we used firm size (logarithm of total assets), profitability
(EBIT/total assets), leverage (total debt/t total shareholders‟ equity), dividend yield (cash dividends paid/ total
shareholder equity) and R&D sensitivity (dummy variables). To control shareholders ownership and board
control, the same control variables are used.
Theoretical Model
Empirically, the following regression models are used to test the hypotheses:
Qit =
0
+
+
1
GSBODit +
5TLBODit
+
2
PARLBORDit +
6 ln(TOAit)
+
7
ROAit +
3
GOWNit +
8LOAit
+
4
it
RMOWNit
(3.3)
Proceedings of the Australian Academy of Business and Social Sciences Conference 2014
(in partnership with The Journal of Developing Areas)
ISBN 978-0-9925622-0-5
VAICit =
0
+
+
1
GSBODit +
5TLBODit
+
2
PARLBORDit +
6TOAit
+
7
ROAit +
3
GOWNit +
8Levrgit
+
4
RMOWNit
8divyieldit
+ 8RNDit + it
(3.4)
Where,
Qit = financial value of the firm for firm i in year t
GSBODit = key government servant/s on board
PARLBORDit = politician/s on Board
GOWNit = government ownership
RMOWNit = richest men ownership
TLBODit = total no of directors on board
TOAit = the book value of total assets at the end of the fiscal year
ROAit = profitability (EBIT/total assets)
LOAit = leverage (total debt/total assets)
Levrgit = leverage on shareholders‟ equity (total debt/t total shareholders‟ equity)
divyieldit = dividend yield (cash dividends paid/ total shareholder equity)
RNDit = R&D sensitivity (A dummy variable of 1 is used if the amount of R&D expense is disclosed
separately in its annual report and 0 otherwise)
RESULTS AND DISCUSSION
Descriptive Statistics
Table 4.1 provides summary statistics for the sample firms of 40 richest tycoons in Malaysia. We compare the
politically connected firm and non-politically connected firms in our sample. Politically connected firm are, not
surprisingly, larger than non-politically connected firms both in terms of number of samples and total assets (218
firms vs. 46 firms in number of samples and means score of 9.354 vs. 8.976 in total assets). The average means
score for politically connected variables such as key government servant/s on board (0.167 vs 0.011), politician
on board (0.084 vs 0.011) and government ownership (0.084 vs 0.005) are also higher for politically connected
firm compared to non-politically connected firms. However, the firm value, profitability and richest men
ownership provided lower means score for politically connected firm than for non-politically connected firm
(with the means score of 0.780 vs 0.981 in Tobin‟s Q, 4.773 vs 6.639 in VAIC, 0.070 vs 0.072 in return on
assets and 0.447 vs 0.531 in richest men ownership). Meanwhile, the leverage, dividend yield and R&D
sensitivities provided mixed results for politically connected firm and non-politically connected firm. Thus, in
our sample, politically connected firms are larger in terms of number of samples and firm size but have lower
growth opportunities and lower value than non-political connected firms.
TABLE 4.1: DESCRIPTIVE STATISTICS OF PCON AND NON-PCON FIRMS (2009-2012)
OVERALL COMPANIES (N =
264)
PCON firm (N=218)
NON PCON firm (N =
46)
No
Variable
Mean
Std. Dev.
Mean
Std. Dev.
Mean
Std. Dev.
1
Tobins Q
0.815
0.568
0.780
0.522
0.981
0.733
2
VAIC
5.098
4.334
4.773
3.319
6.639
7.329
3
GSBOD
0.140
0.129
0.167
0.125
0.011
0.036
4
PARLBORD
0.072
0.116
0.084
0.123
0.011
0.036
5
GOWN
0.070
0.095
0.084
0.099
0.005
0.020
6
RMOWN
0.459
0.178
0.447
0.174
0.513
0.191
7
TOA
9.288
0.723
9.354
0.718
8.976
0.671
8
ROA
0.070
0.242
0.070
0.264
0.072
0.068
9
LOA
0.415
0.248
0.408
0.253
0.445
0.226
10
TLBOD
8.178
2.103
8.349
2.168
7.370
1.540
11
Divyield
0.059
0.184
0.060
0.198
0.052
0.099
12
Levrg
1.395
3.469
1.484
3.799
0.971
0.725
13
RND
0.508
0.501
0.491
0.501
0.587
0.498
Proceedings of the Australian Academy of Business and Social Sciences Conference 2014
(in partnership with The Journal of Developing Areas)
ISBN 978-0-9925622-0-5
Univariate Analysis
A Pairwise correlation analysis is performed on the independent variables and Tobin‟s Q as shown in Table 4.2
and VAIC in Table 4.3, to check for the degree of multicollinearity among the variables. Based on the results in
Table 4.2, it can be seen that from the three measures of politically connected characteristics, key government
servant/s on board is negatively correlated and government ownership is positively correlated at 10%
significance level respectively, meanwhile politician/s on Board is not correlated. These results are consistent
with several prior studies (Johnson and Mitton, 2003, Chang and Wong, 2004, Fraser et al., 2006). Additionally,
others control variables such as richest men ownership and total of assets is also negatively correlated at 5% and
10% level respectively and total number of directors on board is positively correlated at 10% level. Others do not
affect financial value of the firm.
TABLE 4.2 A PAIRWISE CORRELATIONS BETWEEN INDEPENDENCE VARIABLES AND
TOBIN’S Q (2009-2012)
1
Tobins Q
2
3
4
5
6
7
-0.086c
1
PARLBORD
-0.131
-0.169
1
c
0.121
0.087c
1
b
b
-0.170
-0.218
1
c
-0.118
0.255
-0.219
1
c
0.311
1
RMOWN
0.080
-0.018
0.035
0.079
c
-0.094
c
0.216
-0.130
0.322
ROA
-0.253
0.099
c
-0.107
-0.054
c
0.194
0.104
0.154
1
LOA
0.411
-0.010a
0.013b
0.101
-0.271
0.155
0.156
-0.447
TLBOD
TOA
a
b
9
1
GSBOD
GOWN
8
-0.075
0.076
1
c
. , Represents statistical significance at the 1%, 5%, and 10% levels, respectively.
Table 4.3 represents a correlation matrix between independence variables and VAIC. Based on the results,
politician/s on Board is negatively correlated at 5% significance level and government ownership is positively
correlated at 10% level. However, key government servant/s on board loses its significance. Referring to others
control variables, richest men ownership is positively correlated at 5% level, profitability and dividend yield are
positively correlated at 10% level meanwhile leverage on shareholders‟ equity is negatively correlated at 10%
level. Even though there are significant correlations among some of the independent variables and also between
some of the independent variables and the control factors, none of the coefficients exceeds 0.8, which is used as
an indicator of serious multicollinearity (Gujarati, 1992, Gujarati and Porter, 1999). Hence, it may be concluded
that multicollinearity is not a serious problem in this case.
TABLE 4.3 A PAIRWISE CORRELATIONS BETWEEN INDEPENDENCE VARIABLES AND VAIC
(2009-2012)
1
VAIC
GSBOD
PARLBORD
GOWN
RMOWN
2
3
4
1
1
c
0.121
0.087c
1
b
b
-0.170
-0.218
1
-0.130
0.322
0.076c
1
c
0.194
0.154
1
-0.092
c
0.200
0.009a
1
0.066
c
b
0.144
0.075c
1
0.384
c
c
0.027b
0.057
0.039
0.035
ROA
0.098
c
-0.107
-0.063
c
0.129
c
0.109
0.096
c
a
-0.110
a
b
c
9
-0.169
c
a
8
-0.175
0.216
RND
7
-0.020b
0.239
Divyield
6
10
1
TOA
Levrg
5
0.242
0.099
-0.004
0.143
0.079
-0.168
-0.054
0.006
-0.023
b
0.112
. , Represents statistical significance at the 1%, 5%, and 10% levels, respectively.
0.021
0.080
0.088
1
Proceedings of the Australian Academy of Business and Social Sciences Conference 2014
(in partnership with The Journal of Developing Areas)
ISBN 978-0-9925622-0-5
By setting the Tobin‟s Q coefficient as the dependant variable, the political connection and control factors as
independent variables, we now performed a regression analysis. This analysis aims to address the first research
objective of testing the relationship between political connection and the value of the firm. The results of this
analysis are shown in Table 4.4.
Regression Analysis
In this section, we report how political connection affects firm value. Tobin‟s Q is used as a proxy to financial
value of the firm. We estimate a fixed-effects regression model and statistics are adjusted for heteroskedasticity
analysis. A fixed effect specification helps capture the effect of the unobservable variables, and therefore
alleviates the endogeneity problem caused by the omitted variables (Wooldridge, 2010).
To achieve the second objective, which is to examine the effect of each political connection characteristic on
firm value, we estimate five separate models. Each model measures each proxy of political connection. The
results appear in Table 4.4. From the results, one out of three politically connection variables (MODEL 4)
displays positive and significant estimated coefficients at 0.656 and (p<0.10). Other models fail to exhibit a
significant estimated coefficient.
The results suggest that in the Malaysia‟s 40 richest tycoon companies, political connection is less likely
related to financial value of the firm; only government ownership are positively associated with financial value
of the firm. This evidence is consistent with the wealthiest Hypothesis. Firms that are controlled by wealthiest
people are likely to hedge their political bets, as a result, are poorly related to direct political connection.
Consequently, the changes of key government officers on board and politician on board do not affect financial
value of the firm. Meanwhile, government ownership appears to increase firm value at 10% significance level.
TABLE 4.4 FIXED-EFFECTS REGRESSION ANALYSIS: POLITICAL CONNECTION WITH
TOBIN’S Q
Intercept
MODEL 1
MODEL 2
MODEL 3
MODEL 4
MODEL 5
(t-statistics)
(t-statistics)
(t-statistics)
(t-statistics)
(t-statistics)
5.871
***
(2.830)
5.858
***
(2.830)
GSBOD
5.891
***
(2.830)
5.847
***
(2.850)
0.125
(0.260)
(0.710)
-0.114
-0.169
(-0.850)
(-0.960)
GOWN
TLBOD
TOA
ROA
LOA
0.619
F-statistics
Adjusted R2
N
0.656
(1.870)
(1.980)
-0.264
-0.272
-0.165
-0.169
(-0.840)
(-0.840)
(-0.850)
(-0.480)
(-0.490)
-0.026
-0.026
-0.026
-0.031
-0.032
(-1.380)
(-1.380)
(-1.380)
(-1.580)
(-1.600)
**
-0.561
**
-0.562
**
-0.567
**
-0.566
(-2.350)
(-2.350)
(-2.340)
(-2.40)
(-2.390)
0.084
0.085
0.082
0.087
0.087
(0.280)
(0.280)
(0.270)
(0.300)
(0.290)
1.187
*
(1.920)
Year dummies
*
-0.264
-0.562
*
(1.900)
Yes
653.1
1.190
534.16
*
(1.910)
Yes
***
1.185
570.3
1.236
**
(2.020)
Yes
***
***
(2.850)
0.040
PARLBOD
RMOWN
5.835
624.02
**
**
(2.000)
Yes
***
1.246
*
Yes
***
479.65
9.88%
9.89%
10.14%
10.30%
10.73%
264
264
264
264
264
***
Proceedings of the Australian Academy of Business and Social Sciences Conference 2014
(in partnership with The Journal of Developing Areas)
ISBN 978-0-9925622-0-5
To provide further evidence, we run additional empirical tests on non-financial values of the firm (VAIC).
Table 4.5 shows the results of a fixed-effects analysis on political connection and VAIC. The results show that
only politician on board (MODEL 8) exhibits positive and highly significant estimated coefficients at 6.322 and
(p<0.05). Interestingly, government ownership and key government servant/s on board are not related to firm
value. Thus, the additional tests based on non-financial value of firms strengthen the earlier results using
financial value, in that the association between political connection and firm value are less likely driven by direct
political connection, as hypothesized.
TABLE 4.5 FIXED-EFFECTS REGRESSION ANALYSIS: POLITICAL CONNECTION WITH VAIC
Intercept
MODEL 6
MODEL 7
MODEL 8
(t-statistics)
(t-statistics)
(t-statistics)
MODEL 9
MODEL 10
(t-statistics)
(t-statistics)
-16.243
-17.028
-17.028
-16.203
-18.276
(-1.260)
(-1.320)
(-1.320)
(-1.260)
(-1.430)
GSBOD
3.024
4.294
(1.280)
(1.730)
PARLBOD
6.322
**
7.763
(2.480)
TLBOD
ROA
6.442
6.298
6.796
(0.950)
(0.950)
(1.010)
(0.970)
(1.040)
0.353
0.361
0.344
0.348
(1.230)
(1.260)
(1.190)
(1.200)
**
1.706
1.747
1.734
1.688
1.778
(1.580)
(1.630)
(1.610)
(1.570)
(1.670)
-1.594
-1.495
-1.610
-1.553
(-1.160)
(-1.090)
(-1.10)
(-1.060)
-0.148
-0.149
(-3.360)
(-3.410)
(-3.370)
(-3.410)
(-3.510)
-0.122
-0.027
-0.121
-0.132
0.002
(-0.440)
(-0.090)
(-0.430)
(-0.480)
(0.01)
0.255
0.225
-0.049
0.280
-0.132
(0.780)
(0.680)
(-0.110)
(0.840)
(-0.260)
-1.572
**
(-1.140)
Levrg
Divyield
RND
1.617
(-0.350)
6.085
(1.240)
TOA
1.420
(-0.330)
6.074
0.355
-0.148
***
**
(2.330)
GOWN
RMOWN
*
***
-0.145
***
-0.146
*
***
***,**,* Represents statistical significance at the 1, 5, and 10% levels, respectively.
CONCLUDING REMARKS
The issue of political connection has increasingly attracted more attention lately. Political connections build as
an informal substitute mechanism for private enterprises to overcome the drawbacks of market institutions (Yang
et al., 2012). The idea is that companies that have political connection are easy to access government patronage
(Salleh and Ahmad, 2012). Nevertheless, the misused of political network may exacerbate agency conflicts, thus
facilitating misused of allocated resources that may destroys firm value. From the views of academia, this issue
has come under careful scrutiny as shown by a number of recent studies (Lau and Tong, 2008, Johnson and
Mitton, 2003, Shleifer and Vishny, 1994).
In this study, we examine the value of direct political connection on Malaysia‟s top richest tycoon
companies. We find empirical evidence consistent with wealthiest hypothesis. Using various objective measures
of direct political connection and firm value, we discover a positive relationship between direct political
connection and firm value of Malaysia‟s top richest tycoon companies. Government ownership appears to
increase financial value of the firm meanwhile politician on board appears to increase non-financial value of the
firm. In the case of Malaysia, this study contradicts with those of Bliss and Gul (2012), Mitchell and Joseph
Proceedings of the Australian Academy of Business and Social Sciences Conference 2014
(in partnership with The Journal of Developing Areas)
ISBN 978-0-9925622-0-5
(2010) and Fraser et al. (2006) which directly or indirectly indicate that political connection destroyed firm
value. Interestingly, the findings of this study suggest that in the case of majority shares is controlled by
„peripheral capitalism‟, government intervention in terms of placing ownership control through GLCs and nonGLCs, is able to improve financial value of the firm, meanwhile placing their politician/s on board is able to
increase non-financial value of the firm. However, this relationship is only significant at 10% and 5% level,
which signifies a possibility of indirect political connection with political elites.
According to Abboud (2013), business elites are likely to have a closed link with high ranking political
elites. They also hedge their political bets in favor of political outcome that ensures their continued access to
economic power and wealth. Additionally as stated by Johnson and Mitton (2003), companies that have strong
ties with high ranking political elites, are able to absorb political benefits.
This study contributes to the accounting and finance literature in a number of ways. First, our results provide
support for political benefits as an explanation for Malaysian public listed companies. Although the results are
contradict with those of Bliss and Gul (2012), Mitchell and Joseph (2010) and Fraser et al. (2006), but they are in
line with Gomez (2009) who stated that in the case of corporate Malaysia history, a selected richest tycoon
companies have received numerous political benefits from the state because it is believed to enhance a stategenerated rents productively. Second, we contribute to this fledging but progressively growing literature (see for
example of Bliss and Gul, 2012, Wu et al., 2012 and Yeh et al., 2013) by showing that in the case of majority
share is controlled by „peripheral capitalism‟, government ownership and politician on board materially and
positively impact firm value. Finally, the results of this study corroborate those of Abboud (2013), who report
that business elites hedge their political bets in favor of controlling their economic power and wealth.
Nevertheless, this study has its limitations. The data that are based only on direct political connection may not
provide more generalized results. Thus, it is open for further research on estimating the value of indirect political
connection in business tycoon companies.
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