Changes in Malaysia: Capital controls, prime ministers and political connections

Pacific-Basin Finance Journal 18 (2010) 460–476

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Pacific-Basin Finance Journal j o u r n a l h o m e p a g e : w w w. e l s ev i e r. c o m / l o c a t e / p a c f i n

Changes in Malaysia: Capital controls, prime ministers and political connections Heather Mitchell a,⁎, Saramma Joseph b a b

School of Economics, Finance and Marketing, RMIT University, Australia Metropolitan College, Sobiz, INTISJ, Malaysia

a r t i c l e

i n f o

Article history: Received 29 March 2009 Accepted 24 May 2010 Available online 4 June 2010 JEL classification: G18 F31 Keywords: Political connections Capital controls Exchange rates

a b s t r a c t During the 1997 Asian currency crisis and resulting imposition of capital controls in Malaysia, evidence from previous studies shows that firms with political connections suffered more during the crisis but benefited more when capital controls were introduced. In the period since then, the evidence shows financial firms with political connections have not performed as well as others since the measures set up to support them have been removed. The study period not only includes the relaxation of capital controls, but also the resignation of Tun Dr. Mahathir Mohammad as prime minister and the handover of control to Datuk Seri Abdullah Ahmad Badawi. © 2010 Elsevier B.V. All rights reserved.

1. Introduction On the 1st of September 1998 the Prime Minister of Malaysia, Tun Dr. Mahathir Mohammad, surprised financial markets by introducing a raft of capital control measures. This was done against the advice of the Malaysian central bank and was unlike approaches taken by Korea, Indonesia and Thailand. It was also contrary to pronouncements by the Deputy Prime Minister and Finance Minister Datuk Seri Anwar Ibrahim, who was dismissed the following day and later jailed on charges of corruption and sexual misconduct. The official reason given for the capital controls was that the panic caused by the Asian financial crisis was creating severe problems for Malaysia, which would be stabilised by restricting the free flow of funds. Malaysia's acting central bank governor, Zeti Akhtar Aziz said these measures were required to “minimise the impact of a possible economic crisis and a breakdown in the international financial system”.1 This reasoning is supported by Krugman (1998), who argued that capital controls should be used to stabilise economies during the currency crisis, even at the risk of increasing corruption and cronyism. Kaplan and ⁎ Corresponding author. Level 12, 239 Bourke Street, Melbourne 3000, Australia. Tel.: + 61 3 99255876; fax: +61 3 99252986. E-mail address: [email protected] (H. Mitchell). 1 Quoted in the International Herald Tribune by Fuller (1998). 0927-538X/$ – see front matter © 2010 Elsevier B.V. All rights reserved. doi:10.1016/j.pacfin.2010.05.002

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Rodrik (2002) argue that the Malaysian recovery was better than it would have been without the capital controls, by comparing its recovery with those countries that followed the conventional IMF approach in the region. They also claim that the flow of funds out of Malaysia would have increased dramatically after the sacking of Anwar had the controls not been in place. The capital controls have been gradually reduced and the exchange rate peg was removed on 21st July 2005. In his seminal paper “The Theory of Economic Regulation”, Stigler (1971) discussed the ability of special interest groups to obtain regulation which furthered their economic interests over other groups or the general population. Later Olson (1982) also contended that special interest groups were able to extract rents from government. Although this paper considers individual firms, we contend that their special connections to government, either through cronyism or government ownership, give them the type of influence that can be found in larger special interest groups. Rajan and Zingales (1998) contend that “cronyism” may increase the likelihood of a financial crisis and hence the implementation of capital controls. They argue that without transparency and a strong legal contract system, relationship based financial systems are likely to be preferred to arms length systems. As they are not part of the relationship based system, overseas investors will be unwilling to invest long term because of the lack of transparency. If a free capital market exists, so investors can repatriate their capital, this will increase the risk of a financial crisis. Although studies have examined the introduction of capital controls, both on Malaysia's economic recovery and on firm performance, to the best of our knowledge, none have looked at the effects of their removal. There is some evidence of adverse effects on favoured firms in other countries following the removal of regulation. For example, a study by Morck et al. (2000) in Canada found adverse effects on wellconnected firms when trade barriers were reduced after the US–Canada free trade agreement in 1998. In this study we consider the impact of the removal of these capital controls on the performance of firms' share prices. We also consider the effect of the change in political leadership from Mahathir, who had many connections with firms, to Datuk Abdullah Ahmad Badawi, with few (if any) connections, on 31st October 2003. In particular, we look at differences in firms' performance based on their connections to government, both official connections through government shareholdings and “crony” type connections. In their 2003 study, Johnson and Mitton examined the performance of individual Malaysian firms over the crisis period, and compared the performance of firms with crony political connections to those without. This showed that strongly politically connected firms suffered more at the beginning of the crisis, when government subsidies were reduced. After capital controls were introduced, firms with good political connections increased relatively more in value. “The evidence suggests Malaysian capital controls provided a screen behind which favoured firms could be supported.2” They found that 32% of the increase in firms' value could be attributed to their political connections. This increase in value can be attributed, at least in part, to an implicit government guarantee for connected firms. Faccio et al. (2006) examined the relationship between political connections and corporate bailouts by governments using a cross-country study with data from 1997 to 2002. They found that of the 51 bailouts of politically connected firms, 17 happened in Malaysia while only three of the 20 non-connected bailouts did. This discrepancy was so large that the authors felt obliged to re-estimate their models without Malaysia, in case this was driving their results. They found that political connections significantly increased the probability of a firm receiving a government bailout. They also found that, of the firms that did receive bailouts, the unconnected firms were performing significantly better than the connected firms after two years, indicating that the decision to provide a bailout was not solely based on the firm's potential performance. In the finance industry, Chong et al. (2006) showed there was considerable evidence of cronyism in the program of forced mergers instituted by the government. This was evident in the selection of acquiring and target banks, and they found that the mergers overall destroyed aggregate economic value. Since the introduction of capital controls there have been major political changes in Malaysia, the most important being the resignation of Dr. Mahathir and his replacement by Datuk Abdullah Ahmad Badawi on 31st October 2003. Johnson and Mitton (2003) named Mahathir as being a primary political connection to twelve firms, based on the book by Gomez and Jomo (1997). In contrast, Badawi is not named in connection

2

Johnson and Mitton (2003) p. 351 abstract.

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with any firm. In fact the only reference to him at all in the Gomez and Jomo work was to claim he had been discriminated against by media companies politically connected to Anwar. More recently though there has been some implied connections through his son-in-law,3 Khairy Jamaluddin.4 The literature discussed above concentrates on “crony” type connections. In this study we examine both firms with crony connections and those owned in part, or whole, by the government. We expect that firms with some degree of government ownership could expect government support even without the screen of capital controls. We would also expect that firms with government ownership to be more likely to receive support, regardless of changes in the power structure. As a result they may be less sensitive to changes in government leadership or policy than unconnected firms. In the following section we look at the changes that have occurred in Malaysia since the currency controls were introduced and discuss their likely effect on firm performance. We consider both the relaxation of the currency controls and the change in political leadership, both of which are likely to disadvantage politically connected “crony” firms. In Section 3 the data is described and in Section 4 the results of the analysis are presented. The final section gives the conclusions. 2. Changes in Malaysia Our study starts one month after the introduction of the capital control measures, on the 1st of September 1998. These measures pegged the Malaysian ringgit to the US dollar at a rate of RM3.80 to one US dollar. Portfolio investors were restricted from repatriating funds invested in Malaysia until 1st September 1999. Offshore trading of ringgit was not permitted and the ringgit was no longer legal tender outside Malaysia. This resulted in the downgrading of Malaysia's sovereign debt ratings by international credit rating agencies. Major international agencies including Dow-Jones, the International Finance Corporation (IFC) and Morgan Stanley removed Malaysia from their investment benchmarks. The first period we consider in this study is from the 1st of October 1998 to the 30th of September 2000. We call this the restructuring period and is the last period considered by Johnson and Mitton (2003).5 The period saw a decrease in controls on capital movement but forced mergers among financial firms. During the restructuring period capital controls on portfolio outflows were eased following increasing economic stability. In February 1999, the 12 month holding period restriction on portfolio investment repatriation was replaced by a two-tier exit levy. On 21st September 1999, the graduated exit levy was eliminated in favour of a uniform tax of 10% on profit repatriated. As a result Malaysia's sovereign ratings were upgraded at the end of 1999. Malaysia was reinstated in the Dow-Jones Investment indices and the IFC indices in November 1999, and later, the MSCI in May 2000. In this same period a forced merger scheme for financial institutions was introduced. On 29th July 1999 the Malaysian central bank, Bank Negara Malaysia (BNM), announced that the existing 54 financial institutions were required to merge to form six banking groups by the end of 1999. The six acquiring or “anchor” banks were nominated by BNM and their selection was believed to be highly politically motivated (see for example Chong et al. 2006). After strong protests the number of groups was increased to ten, institutions were given until the end of January 2000 to find partners and the merger agreements were not required to be concluded until August 2000. This shows that while controls were reduced for most sectors, there was increased regulation of the financial sector, which leads us to our first two hypotheses: Hypothesis 1. For non-financial firms, politically favoured firms should underperform outsiders as the shield provided by the capital controls is reduced during this period. Hypothesis 2. Politically favoured financial firms should outperform others as they are more likely to benefit from the forced mergers during this period.

3 Jamaluddin had previously been associated with Anwar's daughter, but the relationship ended with Anwar's fall from power and he married Badawi's daughter in October 2001. 4 In late 2005 Jamaluddin was sold approximately 13 million shares in ECM Libra Avenue at a discounted price. He later “voluntarily” divested himself of the shares at a loss of around 200,000 RM. 5 Although the period is the same, our sample of firms is different as Johnson and Mitton used the Worldscope database while we are using DataStream.

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Our second period starts on 1st October 2000, the end of the Johnson and Mitton (2003) study and ends on the 21st of June 2002, the day before Mahathir's resignation speech. We call this the consolidation period and there were few major changes during this time. The most important change was that in February 2001, the 10% exit levy was abolished for portfolio capital profits repatriated after 12 months, and on 2nd May 2001, it was completely removed. Our next hypothesis then is: Hypothesis 3. There is no significant difference in performance between politically favoured firms and others during the consolidation period. The third period, which we call the transition period, starts on the 22nd of June 2002, the day of Mahathir's resignation announcement, and ends on 30th October 2003, the last day of his prime ministership. Mahathir unexpectedly announced his resignation at the UMNO General Assembly. His party members persuaded him to stay for another 18 months to enable a planned handover to his deputy Badawi on 31st October 2003. After 22 years in office, he was awarded the highest honour (in Malaysia) “Tun”. As this news was genuinely unexpected and ended a stable period of government, this would cause uncertainty in the market; however we would expect that firms with a formal connection to government may be insulted from the strongest effects. We propose the following hypothesis: Hypothesis 4. All firms will show a decrease in performance over this period. We know of no firms with strong personal connections to Badawi at this time. Even his son-in-law's connections were not evident then. For this reason we will concentrate on the loss of value in firms with known connections to Mahathir. It is also possible that firms that were previously connected to Anwar retained some taint of this, in which case they would not be as badly affected as other firms. This leads to the following hypotheses: Hypothesis 5. Firms with a connection to Anwar will not be as adversely affected as other firms. Hypothesis 6. Firms with a connection to Mahathir will show a larger decrease than average. We have data on 16 firms with connections to Anwar, but only on four firms with specific connections to Mahathir, so we cannot reliably estimate the effect of this connection. As a result Hypothesis 6 has been modified to: Hypothesis 6a. Firms with an unofficial political connection which does not include Anwar will show a larger decrease than average. As the markets were likely to be reassured by the gradual 18 month handover, instead of the immediate resignation that was originally proposed, we will consider the first month of this period separately. The next period, from the 31st of October 2003 until the 21st July 2005, starts with the handover of power to Badawi and ends with the removal of the currency peg. We call this the resolution period. Badawi had been appointed Deputy Prime Minister in 1998. Upon becoming Prime Minister he promised to tackle corruption. Anti-Corruption agencies were given more power. Several public figures from the Mahathir era have been arrested for corruption. Although Badawi won his rival Anwar's job, he did not interfere with the Federal Court's decision to overturn the conviction for sodomy and consequent release from prison in September 2004. In 1988 three government institutions were set up to help stabilise the financial sector. All ceased operations around this time. The Corporate Debt Restructuring Committee (CDRC) was set up to provide a platform for both borrowers and creditors to work out feasible debt restructuring schemes without having to resort to legal proceedings. It resolved 48 debt cases, amounting to RM52.6 billion. This formed 65% of the cases it undertook. It ceased operations on 15th August 2002 (Bank Negara Malaysia, 2002). Danamodal recapitalised banks. It provided funds of RM7.6 billion to ten banking institutions. From this RM6.6 billion was recovered in 2003. The balance of RM1 billion in one institution was divested in 2004 (Bank Negara Malaysia, 2004). Finally, Danaharta discounted and bought bad loans from banks. It acquired RM50 billion in loans and was able to recover 59% of the loans acquired by December 2005, when it ceased operations. These and the removal of the currency peg completed the removal of the emergency measures put in place during the Asian financial crisis.

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Because of the removal of these measures and the attempts to reduce corruption, we would expect the value of political connections to decline over this period. As most of the assistance measures that ended during this period assisted banks, we would expect financial firms to be more adversely effected. This leads to our next hypothesis: Hypothesis 7. Politically favoured firms should underperform others during the resolution period, with financial firms performing worse than others. The final period starts on the 22nd of July 2005 and ends on 30th June 2006. It is included primarily for comparison. Although Mahathir held no official position in the government, he was still active. He was an adviser to Petronas (National Oil Company) and Proton (The National Car Company). He also commented on political events, notably, on the 7th of June 2006, he criticised the present Prime Minister and the government's decision to scrap the Johor–Singapore causeway replacement (Sujata, 2006); however, his position did not receive the usual press support it would have while he was prime minister. His influence seems to have declined, as the new leadership has consolidated its power and tends to ignore his pronouncements. This is unlike the situation in some other countries, notably Singapore, where the retired leader still wielded considerable influence. Our penultimate hypothesis is: Hypothesis 8. There is no significant difference in performance between politically favoured firms and others during the final period. As it is politically acceptable to support firms with a degree of government ownership or control, we would expect them to be relatively immune to changes in political power or regulation. Our final hypothesis is therefore: Hypothesis 9. Government Linked Companies and Khazanah firms will be less strongly affected by these events during the restructuring, resignation and resolution periods than firms with unofficial political connections or firms with no connections. With the exception of the resignation of Mahathir and possibly the exact date of the lifting of the currency peg, the changes discussed above were gradual and well anticipated by the market. As a result, we do not expect to see the same dramatic changes in value found by Johnson and Mitton (2003) after the imposition of currency controls. 3. Data We use data on 625 firms that are listed on the KLSE main board6 and have data available on DataStream. Data on all firms is not available for the whole period. We calculate monthly returns, inclusive of dividends, based on Malaysian ringgit. We use raw returns rather than risk adjusted because we would need to use betas calculated during the crisis period, which are likely to be highly variable during the crisis period and unlikely to be representative of post-crisis behaviour. This is confirmed by Choudry (2005) who looked for evidence of time variation of betas over the crisis period in a sample of Malaysian and Taiwanese stocks. All of the ten Malaysian stocks he examined, three of which had political connections, showed evidence of time variation in their betas. To compensate for this use of raw returns we use firm specific factors, such as firm size, leverage and industry type, as control variables in the regressions. In this, and the selection of firm specific factors, we follow Johnson and Mitton (2003). Over the period of this study we would expect firms connected to Mahathir and his associates to perform less well, both through loss of political patronage and because of the reduction of the screen provided by capital controls. To determine which firms have unofficial or “crony” type connections, we use the list from Johnson and Mitton (2003). These are given in Appendix A. These connections are based on personal relationships often developed with rising politicians were not determined by the nature of the firm. Such connections had already lasted many years before the 2003 study and can be expected to be largely in place, with the possible exception of Anwar-connected firms. Johnson and Mitton (2003, p. 354)

6

Second board firms are not used as information on political connections is not available for the firms provided by DataStream.

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state that in 1999, “Anwar-connected firms were either taken over by Mahathir-connected firms or their owners switched allegiance to Mahathir.” For this reason we treat these firms as a single class; however we look at possible differences in performance depending on their connections during the period immediately following Mahathir's resignation. As well as comparing these with politically unconnected firms, we also compare these to the official “Government Linked Companies” (GLC). “GLCs are defined as companies that have a primary commercial objective and in which the Malaysian Government has a direct controlling stake. Controlling stake refers to the Government's ability (not just percentage ownership) to appoint BOD members, senior management, make major decisions (e.g. contract awards, strategy, restructuring and financing, acquisitions and divestments etc. ) directly or through GLICs7”.8 Khazanah Nasional Berhad9 is the national government's investment arm and has shareholdings in many of these companies. We would expect both these types of firms to benefit more from government actions than those with an unofficial political connection or no connection, as the government could claim a public interest in the preferential treatment of these firms. We would also expect them to suffer less during the removal of the control and support measures for the same reason. All financial variables are measured in ringgit. Firm size is measured using the natural log of total assets and growth is the percentage growth in total assets in the previous year. Return on assets is net income (for financial firms) or net sales (for non-financials) divided by total assets. Profit margin is net sales or net revenues divided by operating income in percentages. The current ratio is measured as current assets divided by current debt and the quick ratio as cash and equivalents plus receivables divided by current debt. Assets turnover is net sales divided by total assets and inventory turnover is net sales divided by total inventory. Leverage, or the debt ratio, is measured as the ratio of total debt to total assets and short term debt is all debt with a maturity of less than one year. Book-to-market ratio is the book value of the share divided by the market value. All variables are constructed using data from the DataStream database. For the industry dummy variables included in the regressions, we used the twelve classifications provided on the KLSE website, but some categories were merged because of the small number of firms which had data available. For at least some of the periods data was only available for one or two firms, making the use of an industry dummy impossible or at least very inefficient. Mining was merged with construction, real estate with property and hotels, infrastructure and technology with services. Firms' political connections have been classified using three different criteria. The first are those firms having unofficial political connections, based on the work of Gomez and Jomo (1997), and the other two groups have formal government connections. The first of these are Khazanah (KNB) firms, which have some degree of government ownership. The second are government-linked firms (GLCs), which have a formal acknowledged relationship with government. As part of this relationship they offer economic advice to government through round table discussions and agree to undertake activities considered to be in the public interest. There is a degree of overlap between the three groups. The largest is between GLC and KNB firms, with seven of the twenty GLC firms also being KNB. In the analysis that follows we consider the three groups separately. A list of connected firms and their type of relationship is given in Appendix A.

4. Results Table 1 shows the result of the preliminary analysis. We consider returns on the companies over the five different periods and look at the financial variables at the start and end of the period. The first panel reports the returns in each of the periods. These are generally consistent with the returns on the KLSE price index, except for the resolution period where the index shows a small positive return.

7

Government Linked Investment Companies. http://www.khazanah.com.my/faq.htm#ques6 accessed 4th September 2006. 9 Khazanah Nasional Berhad is the government's investment arm and was incorporated as a public limited company on 3rd September 1993, commencing operations a year later. The Minister of Finance owns all shares, except for one owned by the Public Land Commissioner (Information from company website). 8

Firm type

All

Johnson and Mitton connection

Khazanah

466

Table 1 Statistics and ratio analysis. Prob is p-value for t-tests for the difference between means of the two groups. The values of the financial variables and growth rates are measured in 1998. TA is total assets, RM is Malaysian ringgit, ROA is return on assets, PM is profit margin, CR is current ratio, QR is quick ratio, ATR is asset turnover ratio, ITR is inventory turnover ratio, TD is total debt and STD is short term debt. Government linked company

Part I: Average monthly percentage returns n

%ret

n

Yes

n

No

Prob

n

Yes

n

No

Prob

n

Yes

n

No

Prob

Oct 98 Sept 00 Oct 00 21 Jun 02 22 Jun 02 Oct 03 22 Jun 02 22 Jul 02 Nov 03 21 Jul 05 22 Jul 05 Jun 06

453 483 525 525 568 609

2.236 −0.502 0.700 −2.262 −1.202 −0.323

52 52 52 52 52 52

1.723 − 0.776 0.034 − 0.384 − 1.617 0.459

401 431 473 473 516 557

2.302 −0.469 0.773 −2.463 −1.160 −0.396

0.129 0.422 0.083 0.144 0.251 0.044

18 21 23 22 25 25

2.183 0.290 −0.147 −3.696 −0.394 0.194

435 462 502 494 543 584

2.238 − 0.538 0.739 − 2.198 − 1.240 − 0.345

0.913 0.048 0.067 0.404 0.125 0.404

17 18 19 18 19 19

2.389 −0.215 0.070 −5.365 −0.068 0.484

436 465 506 498 549 590

2.230 −-0.514 0.723 −2.149 −1.242 −0.349

0.691 0.516 0.114 0.034 0.022 0.156

Firm type

All

Johnson and Mitton connection

Khazanah

Government linked company

Part II: Financial variables at start of study period Variable

n

(A) Size and growth TA RM1000 337 TA growth % 329

Value

n

Yes

n

No

Prob

n

Yes

n

No

Prob

n

Yes

n

No

Prob

2920 4.55

50 49

4659 0.43

287 280

2617 5.27

0.000 0.000

16 16

9984 10.04

321 280

2568 4.27

0.000 0.000

15 14

18,695 3.95

322 315

2185 4.57

0.000 0.730

(B) Profitability ROA % PM %

318 318

−1.02 4.00

46 46

−4.64 −6.81

272 272

−0.40 5.83

0.000 0.000

16 16

−5.76 6.63

302 302

0.63 5.15

0.000 0.209

15 15

− 0.16 6.67

303 303

−1.06 3.87

0.001 0.000

(C) Liquidity CR QR

248 248

1.65 1.21

35 35

1.14 0.85

213 213

1.74 1.27

0.000 0.000

14 14

0.84 0.68

234 234

1.70 1.24

0.000 0.000

10 10

1.10 0.79

238 238

1.68 1.23

0.000 0.000

(D) Asset utilisation ATR % 336 ITR 292

42.5 15.2

50 41

42.6 19.4

286 251

42.5 14.5

0.931 0.000

16 14

36.9 21.1

320 278

42.8 14.9

0.005 0.088

15 13

33.3 5.3

321 279

42.9 15.6

0.000 0.000

(E) Leverage TD/TA STD/TD Increase in TD/TA Increase STD/TD

28.2 62.1 3.8 1.7

50 44 49 42

46.1 58.6 10.3 5.9

287 250 280 240

25.0 62.7 2.7 1.0

0.000 0.000 0.000 0.000

16 16 16 16

41.5 53.1 8.6 −1.7

321 278 313 266

27.5 62.6 3.6 2.0

0.000 0.000 0.000 0.009

15 15 14 14

29.2 54.1 3.4 1.6

322 279 315 268

28.1 62.5 3.9 1.8

0.374 0.000 0.359 0.886

0.348

16

0.869

15

337 294 329 282

(F) Book to market ratio 336

0.743

48

0.923

288

0.713

0.721

320

0.744

0.688

321

0.745

0.687

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Sample period

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Unlike the KLSE price index, which is weighted by market capitalisation, our return is an unweighted average, which would account for the difference. The results from the first restructuring period are consistent with the corresponding period from Johnson and Mitton (2003), in that both connected and unconnected firms have large positive returns and there is no significant difference between returns for the two sets of firms. In the following consolidation period we hypothesised there should be no significant differences between politically favoured firms and others. This is supported for the informal connections and GLCs. During this time Khazanah firms have significantly higher average returns than non-Khazanah firms, with the former firms having positive returns while the later had negative returns on average. During the first month of the resignation period all groups of firms have negative returns. We find that GLC firms are more badly affected than non-GLCs during the first month, but over the whole of the resignation period there is no significant difference. The informal political connections and Khazanah firms show no significant difference in the first month, but they are marginally outperformed by the unconnected firms over the whole period. The returns in the resolution period do not support the hypothesis that politically connected firms underperform during this period. The only significant difference shows GLCs outperforming unconnected firms, contrary to expectations. In the final period we see firms with informal political connections outperforming those without, again contrary to our hypothesis. There are no significant differences between the firms with formal connections and those without. These results, and the others above, are based on the raw returns, with firm specific factors, such as size and industry type, not being considered. To determine whether these are likely to be important, we see if there are any significant differences between the connected and unconnected firms, before drawing any implications. On examining the second panel of Table 1, which reports the financial variables, we find that the connected firms are much larger than the unconnected ones, regardless of the nature of the connection. The growth rates for the firms with unofficial political connections are smaller than those without. These findings are similar to those Johnson and Mitton (2003) found at the start of their study period. In contrast we find that firms with government ownership (Khazanah) are growing more quickly than non-Khazanah and there is no significant difference in the growth rates of GLCs and others. We find that firms with unofficial political connections are less profitable and there is some evidence that this applies to Khazanah firms, though GLCs are more profitable. In all cases, the connected firms are less liquid than the unconnected ones. The results for the asset utilisation, or efficiency measures, are mixed. There is some evidence that firms with unofficial connections are more efficient, and strong evidence that GLCs are less efficient. The unofficially connected firms and Khanazah firms are more highly leveraged than others, and their leverage is increasing more quickly, but there is no significant difference for GLCs. Faccio et al. (2006) find that politically connected firms are typically more highly leveraged than unconnected firms and attribute this to an increased probability of a government bailout. In all cases the ratio of short term to long term debt is higher for the unconnected firms but the increases are higher for unofficial connections and lower for Khazanah firms. The book-to-market ratios are below one for all groups of firms10, suggesting they are overvalued relative to book value. There are no significant differences between groups of firms. To determine if the differences noted above result from underlying differences between the connected and unconnected firms or can be explained by factors such as size or industry sector the regressions given in Table 2 were estimated. In this, and all following regression models, we use White heteroskedasticity adjusted standard errors and t-statistics. We control for industry factors using industry dummy variables and size using the natural log of total assets. We measure profitability using return on assets (ROA) and estimate the following model: ROAi = β0 + β1 JMi + β2 GLCi + β3 KNBi + β4 lnðTAi Þ + β5 Growthi +

∑ βj

j = 1 to 8

+ 5 IDj;i

+ ei

ð1Þ

10 These are significantly less than one for all firms except those with unofficial political connections. Test statistics are not reported here but are available from the corresponding author on request.

468

Firm type

J&M connection GLC Khazanah Firm size Firm growth

Panel A: Profitability

Panel B: Leverage

Panel C: Liquidity

Panel D: Efficiency

Dependent variable is return on assets

Dependent variable is debt ratio

Dependent variable is current ratio

Dependent variable is inventory turnover ratio

Non-finance

Finance

All

Non-finance

Finance

All

Non-finance

All

Non-finance

All

− 3.426 (− 0.438) 6.182 (0.636) − 15.83⁎

− 2.883 (− 0.412) 3.523 (0.450) − 14.80⁎

22.82 (1.311) − 3.668 (− 0.557) 11.10⁎

− 0.317 (− 1.595) 0.194 (0.510) − 0.430⁎⁎

− 0.283 (− 1.438) 0.190 (0.498) − 0.442⁎⁎

(1.767) − 5.553⁎⁎⁎ (− 2.794) − 0.079 (− 1.262) − 5.614⁎

(1.743) 0.849 (0.346) − 0.155⁎ (− 1.800) − 0.491⁎⁎

(− 2.035) − 0.261 (− 1.518) − 0.001 (0.216) − 0.459⁎⁎

35 0.170

(− 1.495) 326 0.074

(− 2.093) 237 0.105

(− 2.102) − 0.258 (− 1.502) 0.001 (0.316) 19.15 (− 2.018) 241 0.108

0.670 (0.033) − 25.79 (− 1.582) 19.27 (0.899) 0.142 (0.026) − 0.289 (0.830) 19.01 (0.891) 269 0.042

1.177 (0.062) − 25.80 (− 1.589) 19.02 (0.885) 0.175 (0.032) − 0.282 (− 0.829)

291 0.230

(1.788) 0.376 (0.138) − 0.117 (− 1.425) 61.26 (− 1.737) 291 0.074

11.87 (0.791) 7.875 (0.398) 4.415 (0.399) 6.540⁎ (1.825) − 0.584⁎⁎ (− 2.072) − 4.236 (1.598) 35 0.349

20.70 (1.318) − 1.112 (− 0.160) 10.04⁎

(− 1.746) − 5.967⁎⁎⁎ (− 2.598) − 0.081 (− 1.215)

− 1.168 (− 0.143) − 5.518 (− 1.159) − 5.454 (1.473) − 3.371⁎⁎⁎ (− 2.417) − 0.034 (− 0.207)

Profitability Number of observations R-squared

326 0.260

(0.886) 274 0.043

H. Mitchell, S. Joseph / Pacific-Basin Finance Journal 18 (2010) 460–476

Table 2 Political connectedness and firm characteristics for restructuring period. The restructuring period starts in October 1998, shortly after the introduction of capital controls, and ends in September 2000. Profitability is measured by return on assets, debt ratio by total debt divided by total assets, firm size by the natural log of total assets and firm growth by percentage increase in total assets. Figures for firm size, growth and profitability are measured in the previous year. As figures for current ratios are only available for four finance firms and inventory figures for five, regressions were not possible for the liquidity and efficiency regressions for financial firms separately. Industry dummy variables were also estimated but the results are not reported. Figures in parentheses are White heteroskedasticity adjusted t-statistics. The symbol ⁎ indicates significance at 10%,⁎⁎ at 5% and ⁎⁎⁎ at 1%.

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469

Table 3 Restructuring period returns and political connections. The restructuring period starts in October 1998, shortly after the introduction of capital controls, and ends in September 2000. The dependent variable is average monthly percentage returns over the period. Firm size is measured by the natural log of total assets and debt ratio by total debt divided by total assets. J&M means the firm has a crony connection noted in Johnson and Mitton's (2003) paper, GLC for a government linked company and Khazanah a firm with a degree of government ownership. There were insufficient GLC and Khazanah firms to use dummy variables for these in the specific financial firm's regressions. Industry dummy variables were also estimated but the results are not reported. Figures in parentheses are White heteroskedasticity adjusted t-statistics. The symbol ⁎ indicates significance at 10%, ⁎⁎ at 5% and ⁎⁎⁎ at 1%. Panel A: All connections

Intercept Connection

Panel B: Specific connections

Non-finance firms

Finance firms

All firms

Non-finance firms

Finance firms

All firms

6.044⁎⁎⁎ (4.655) 0.069 (0.222)

− 1.092 (− 0.407) 0.443 (0.623)

5.159⁎⁎⁎ (4.236) 0.165 (0.570) − 0.001

6.267⁎⁎⁎ (4.777)

− 1.795 (− 0.661)

5.276⁎⁎⁎ (4.291)

− 0.066 (− 0.004) 0.586 (1.189) − 0.030 (− 0.054) − 0.193⁎⁎

0.004 (− 0.086)

J&M GLC Khazanah Firm size Debt ratio Number of observations R-squared

− 0.175⁎⁎ (− 2.084) − 1.744⁎⁎⁎ (− 10.923) 296 0.157

0.275 (1.450) − 3.383⁎⁎⁎ (− 4.925) 40 0.217

− 0.108 (− 1.392) − 1.849⁎⁎⁎ (− 9.738) 336 0.152

(0.013) 0.321 (0.650) 0.309 (0.481) − 0.119 (− 1.496) − 1.831⁎⁎⁎ (− 9.497) 336 0.154

0.332⁎ (1.725) − 3.340⁎⁎⁎ (− 4.980) 40 0.208

(− 2.234) − 1.731⁎⁎⁎ (− 10.719) 296 0.159

Here JM, GLC and KNB are dummy variables for the three types of political connection, TA is total assets and the IDs are the industry dummy variables. The model for leverage is LEVi = β0 + β1 JMi + β2 GLCi + β3 KNBi + β4 lnðTAi Þ + β5 Growthi + β6 ROAi +

∑ βj

j = 1 to 8

+ 6 IDj;i

+ ei ð2Þ

Leverage is measured using total debt divided by total assets. Regression models using the same explanatory variables as Eq. (2) are estimated for liquidity, using the current ratio as the dependent variable, and efficiency, using the inventory turnover ratio as the dependent. As financial firms are expected to behave differently to others, wherever sufficient data are available, models are estimated separately for financial and non-financial firms. None of the dummy variables for the unofficial connections or the GLCs are significant in any of the regressions. This shows that these firms did not perform significantly differently at the start of our study period. The results are different for the non-financial government owned firms. These have higher leverage, lower profitability and lower liquidity, even after firm size and industry factors are taken into account. As a result, any differences between these Khazanah firms and others in the following analysis cannot be confidently attributed to their political connection. In Tables 3–7 we estimate models to assess the impact of political connection over the different periods, using the following equation11: RETi = β0 + β1 JMi + β2 GLCi + β3 KNBi + β4 lnðTAi Þ + β5 LEVi +

∑ βj + 5 IDj;i + ei

j = 1 to 8

ð3Þ

11 We have not used beta as an explanatory variable as evidence shows these tend to be unstable over at least part of this period (see for example Choudry 2005). Instead, we use the accounting variables of total assets and leverage, which, unlike book to market value, show large differences between the classes of firms. This is consistent with Johnson and Mitton (2003).

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Table 4 Consolidation period returns and political connections. The consolidation period starts in October 2000, shortly after the introduction of capital controls, and ends on 21st June 2002, the day before Mahathir announced his resignation. The dependent variable is average monthly percentage returns over the period. Firm size is measured by the natural log of total assets and debt ratio by total debt divided by total assets. J&M means the firm has a crony connection noted in Johnson and Mitton's (2003) paper, GLC for a government linked company and Khazanah a firm with a degree of government ownership. There were insufficient GLC and Khazanah firms to use dummy variables for these in the specific financial firm's regressions. Industry dummy variables were also estimated but the results are not reported. Figures in parentheses are White heteroskedasticity adjusted t-statistics. The symbol ⁎ indicates significance at 10%, ⁎⁎ at 5% and ⁎⁎⁎ at 1%. Panel A: All connections

Intercept Connection

Panel B: Specific connections

Non-finance firms

Finance firms

All firms

Non-finance firms

Finance firms

All firms

− 4.674⁎⁎⁎ (− 3.805) − 0.065 (− 0.207)

− 6.761⁎⁎⁎ (− 2.723) − 1.538⁎⁎

− 4.526⁎⁎⁎ (− 4.042) − 0.234 (− 0.787) − 0.355

− 4.657⁎⁎⁎ (− 3.740)

− 3.180⁎⁎⁎ (− 1.380)

− 4.609⁎⁎⁎ (− 4.092)

0.406 (− 0.974) − 0.697 (− 1.406) 0.902⁎⁎

− 0.321 (0.427)

(− 2.174)

J&M GLC Khazanah Firm size Debt ratio Number of observations R-squared

0.440⁎⁎⁎ (4.576) − 3.500⁎⁎⁎ (− 4.971) 397 0.184

0.472⁎⁎⁎ (2.868) − 0.355 (− 0.331) 40 0.165

0.425⁎⁎⁎ (4.878) − 3.159⁎⁎⁎ (− 4.843) 437 0.172

(1.995) 0.438⁎⁎⁎ (4.476) − 3.539⁎⁎⁎ (− 5.061) 397 0.194

0.208 (1.377) − 0.583 (− 0.514) 40 0.067

(− 0.934) − 1.064⁎⁎ (− 2.413) 0.825⁎ (1.803) 0.468⁎⁎⁎ (4.898) − 3.254⁎⁎⁎ (− 5.005) 437 0.184

For the regressions for financial firms we do not include the GLC or KNB dummies, as there are insufficient financial firms in these categories. We also run regressions using a single dummy variable which is one for firms that have any type of political connection. Table 3 gives the results for the restructuring period immediately after the imposition of currency controls. It shows no difference in performance between connected and unconnected firms. Johnson and Mitton (2003) found evidence that their connected firms had significantly higher returns than average in the month immediately following the imposition of capital controls, September 1998. Our estimation period starts in October 1998 and finds no evidence of either higher, or lower, returns for these firms. This suggests that though there was a one-off increase in the value of these firms, they have not out performed unconnected firms on a continuing basis, but neither have they lost that increase. We had hypothesised that politically connected non-financial firms should underperform others during this period and financial firms should outperform others. Neither of these hypotheses is supported by the regressions as none of the politically connected dummy variables are significant in any of the regressions. The results for the consolidation period leading up to Mahathir's resignation are given in Table 4. We hypothesised that there would be no significant difference in firm performance between connected and unconnected firms. This is supported for non-financial firms, but not for the finance firms, which show a decrease in performance in Panel A. The results in Panel B show the effect of the particular connection type. Unfortunately, there are so few GLC or Khazanah financial firms that dummy variables could not be used for these. When the unofficial political connections only are considered there is no significant difference in performance. The GLC firms show no significant difference in performance when the financials are excluded, but do perform worse when they are included. The Khazanah firms perform slightly worse when the financials are included than when they are excluded, but the difference is not significant. This suggests the significant negative result is driven by the four large GLC financial companies.12 Surprisingly we find that the Khazanah non-financial firms outperform the others.

12

These are Affin Holdings, BIMB Holdings, Malayan Banking and Malaysia Building Society.

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471

Table 5a Transition period returns and political connections. The transition period starts 22nd June 2002, the day Mahathir's resignation was received by the market, and ends in October 2003, when Badawi became Prime Minister. The dependent variable is average monthly percentage returns over the period. Firm size is measured by the natural log of total assets and debt ratio by total debt divided by total assets. J&M means the firm has a crony connection noted in Johnson and Mitton's (2003) paper, GLC for a government linked company and Khazanah a firm with a degree of government ownership. There were insufficient GLC and Khazanah firms to use dummy variables for these in the specific financial firm's regressions. Industry dummy variables were also estimated but the results are not reported. Figures in parentheses are White heteroskedasticity adjusted t-statistics. The symbol ⁎ indicates significance at 10%, ⁎⁎ at 5% and ⁎⁎⁎ at 1%. Panel A: All connections

Intercept Connection

Panel B: Specific connections

Nonfinance firms

Finance firms

All firms

Nonfinance firms

Finance firms

All firms

Nonfinance firms

Finance firms

All firms

− 0.785 (− 0.567) − 0.521 (− 1.532)

2.241 (0.998) 0.234 (0.298)

− 0.294 (− 0.238) − 0.445 (− 1.395)

− 0.952 (− 0.673)

1.663 (0.790)

− 0.343 (− 0.274)

− 0.950 (− 0.673)

2.325 (1.047)

− 0.323 (− 0.259)

− 0.325 (− 0.789) − 0.819⁎⁎

− 0.646 (− 0.657)

− 0.374 (− 0.966) − 0.431 (− 1.053) − 0.351 (− 0.749)

− 1.228 (− 0.940) 0.672 (1.344) − 0.109 (− 0.748) − 1.023 (− 0.582) 41

− 0.441 (− 1.068) − 0.329 (− 0.698) − 0.461 (− 0.948) − 0.183 (− 0.319) 0.118 (1.247) − 1.133 (− 1.599) 508

0.116

0.056

J&M

0.154 (1.439) − 1.141 (− 1.580) 467

− 0.109 (− 0.699) − 1.383 (− 0.842) 41

0.115 (1.223) − 1.148 (− 1.621) 508

0.168 (1.546) − 1.165 (− 1.593) 467

− 0.060 (− 0.440) − 1.369 (− 0.817) 41

0.120 (1.261) −1.145 (− 1.599) 508

− 0.827⁎⁎ (− 2.086) − 0.331 (− 0.653) − 0.370 (− 0.729) − 0.225 (− 0.342) 0.168 (1.548) − 1.159 (− 1.601) 467

0.057

0.046

0.055

0.058

0.066

0.056

0.058

GLC

(− 2.110) − 0.343 (− 0.680)

Khazanah Non-Anwar Anwar Firm size Debt ratio Number of observations R-squared

Panel C: Anwar and non-Anwar

For the resignation period results in Table 5a and 5b, we have included dummy variables for non-Anwar and Anwar connected firms. A firm is classified as Anwar if one of the connections listed in Appendix A is Anwar. If a firm has an unofficial political connection that does not include Anwar, it is designated as non-Anwar. Although it is believed that most Anwar connected firms realigned themselves after his fall, it is possible that some taint of the connection remains which is most likely to show with the resignation of Mahathir. A separate analysis was carried out for the first month of this period as this was when Mahathir announced his shock resignation. In the first part of this table we find that non-finance GLCs underperform all other firms when the whole period is considered. This is the only variable that affects returns in any of the regressions. Even the control variables of firm size and leverage, which are generally significant in the other regressions, have no significant impact here. The second part of the table gives the results for the first month only. In all the regressions the intercept is negative but only significant for the non-finance firms, which does provide support for Hypothesis 4, that firms will underperform during this period. Again GLC firms underperform the other firms. The non-Anwar coefficients are not significant, indicating that Hypothesis 6, that firms with political connection that do not include Anwar will be more adversely effected than other firms, is not supported. There is some evidence to support Hypothesis 5, that Anwar firms will be less adversely affected. The coefficient for the Anwar dummy variable is marginally significant for the model including all firms. By comparing the results for the non-finance and finance firms, it is clear that this result is driven by the finance firms, which has a very large and significant positive coefficient, while the non-finance firms is positive, but relatively small and insignificant. This result needs to be treated with caution though, as there are only three finance firms with Anwar connections.

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Table 5b Transition period returns and political connections — first month returns only. Panel A: All connections

Intercept Connection

Panel B: Specific connections

Nonfinance firms

Finance firms

All firms

− 7.374⁎⁎ (− 2.061) 0.236 (0.189)

− 10.419 (− 0.899) 2.898 (0.752)

− 7.916⁎⁎ − 9.222⁎⁎ (− 2.285) (− 2.461) 0.588 (0.492) 1.262 (0.810) − 1.023 (− 0.474) − 2.620 (− 1.225)

J&M GLC Khazanah

Nonfinance firms

Finance firms

All firms

9.851⁎⁎ (2.541)

2.287 (1.562) − 4.072⁎ (− 1.952) − 1.371 (− 0.658)

Anwar

Debt ratio

0.395 (1.392) 0.828 (0.852) 455

Number of observations R-squared 0.010

Finance firms

Nonfinance firms

− 11.367 − 10.633⁎⁎⁎ − 9.232⁎⁎ − 7.196 (− 0.991) (− 2.946) (− 2.455) (− 0.590)

Non-Anwar

Firm size

Panel C: Anwar and non-Anwar

0.539 (0.675) − 0.462 (− 0.060) 42

0.437 (1.609) 0.722 (0.735) 497

0.552⁎ (1.842) 0.642 (0.647) 455

0.562 (0.727) − 1.633 (− 0.260) 42

0.653⁎⁎ (2.327) 0.372 (0.377) 497

0.053

0.013

0.016

0.210

0.029

− 0.983 (− 0.467) − 2.670 (− 1.255) 1.447 (0.676) 0.861 (0.600) 0.554⁎

All firms

−10.553⁎⁎⁎ (− 2.932)

− 4.112⁎ (− 1.960) − 1.287 (− 0.616) 6.786 1.971 (1.519) (1.015) 17.794⁎⁎⁎ 2.987⁎

(1.840) 0.621 (0.603) 455

(3.419) 0.250 (0.320) 0.985 (0.147) 42

(1.697) 0.654⁎⁎ (2.306) 0.418 (0.411) 497

0.016

0.258

0.029

For the penultimate period given in Table 6, we hypothesised that firms with unofficial political connections should underperform others, with financial firms faring even more badly. The coefficient for the non-financial firms, while negative, is not significant. That for the financial firms is both negative and Table 6 Resolution period returns and political connections. The resolution period starts in November 2003, immediately after Badawi took power, and ends on 21st July 2005, the day the currency peg was removed. The dependent variable is average monthly percentage returns over the period. Firm size is measured by the natural log of total assets and debt ratio by total debt divided by total assets. J&M means the firm has a crony connection noted in Johnson and Mitton's (2003) paper, GLC for a government linked company and Khazanah a firm with a degree of government ownership. There were insufficient GLC and Khazanah firms to use dummy variables for these in the specific financial firm's regressions. Industry dummy variables were also estimated but the results are not reported. Figures in parentheses are White heteroskedasticity adjusted t-statistics. The symbol ⁎ indicates significance at 10%,⁎⁎ at 5% and ⁎⁎⁎ at 1%. Panel A: All connections

Panel B: Specific connections

Non-finance firms

Finance firms

All firms

Non-finance firms

Finance firms

All firms

Intercept

− 6.238⁎⁎⁎

− 8.170⁎⁎⁎

− 6.803⁎⁎⁎

− 6.007⁎⁎⁎

(− 3.137) − 1.269 (− 1.465)

(− 5.351) − 0.071 (− 0.212) − 0.316

(− 4.246)

− 6.447⁎⁎⁎ (− 5.070)

Connection

(− 4.474) 0.132 (0.364)

− 7.113⁎⁎⁎ (− 3.550)

J&M GLC Khazanah Firm size Debt ratio Number of observations R-squared

0.252⁎⁎⁎ (2.670) − 0.576⁎ (− 1.760) 512 0.103

0.561⁎⁎⁎ (3.387) − 4.815⁎⁎ (− 2.514) 41 0.370

0.278⁎⁎⁎ (3.514) − 0.590⁎ (− 1.689) 553 0.107

− 2.129⁎⁎ (− 0.738) 0.464 (0.785) 0.453 (0.760) 0.233⁎⁎ (2.385) − 0.561⁎ (− 1.788) 512 0.106

− 0.563 (− 2.185)

0.490⁎⁎⁎ (3.993) − 4.843⁎⁎⁎ (− 2.770) 41 0.450

− 1.436 0.455 (0.967) 0.462 (0.843) 0.268⁎⁎⁎ (3.117) − 0.574⁎ (− 1.727) 553 0.113

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Table 7 Final period returns and political connections. The final period starts on 22nd July 2005, the day after the currency peg was removed, and ends in June 2006. The dependent variable is average monthly percentage returns over the period. Firm size is measured by the natural log of total assets and debt ratio by total debt divided by total assets. J&M means the firm has a crony connection noted in Johnson and Mitton's (2003) paper, GLC for a government linked company and Khazanah a firm with a degree of government ownership. There were insufficient GLC and Khazanah firms to use dummy variables for these in the specific financial firm's regressions. Industry dummy variables were also estimated but the results are not reported. Figures in parentheses are White heteroskedasticity adjusted t-statistics. The symbol ⁎ indicates significance at 10%, ⁎⁎ at 5% and ⁎⁎⁎ at 1%. Panel A: All connections

Intercept Connection

Panel B: Specific connections

Non-finance firms

Finance firms

All firms

Non-finance firms

Finance firms

All firms

− 7.427⁎⁎⁎ (− 4.896) 0.175 (0.462)

1.215 (0.434) 0.296 (0.373)

− 6.001⁎⁎⁎ (− 4.434) 0.181 (0.519) 0.668

− 7.799⁎⁎⁎ (− 5.040)

1.052 (0.383)

− 6.331⁎⁎⁎ (− 4.532)

0.625 (1.542) − 0.600 (− 0.801) − 0.134 (− 0.192) 0.658⁎⁎⁎

0.674 (0.504)

J&M GLC Khazanah Firm size Debt ratio Number of observations R-squared

0.628⁎⁎⁎ (5.273) − 3.413⁎⁎⁎ (− 4.433) 556 0.126

− 0.053 (− 0.286) 1.853 (0.664) 44 0.016

0.516⁎⁎⁎ (4.888) − 3.157⁎⁎⁎ (− 4.171) 600 0.117

(5.408) − 3.741⁎⁎⁎ (− 4.489) 556 0.130

− 0.041 (− 0.228) 1.581 (0.551) 44 0.023

(1.654) − 0.636 (− 1.008) − 0.017 (− 0.026) 0.542⁎⁎⁎ (4.977) − 3.227⁎⁎⁎ (− 4.250) 600 0.121

significant, giving partial support to our hypothesis. As two of the institutions wound up during this period were specifically set up to bail out banks, this could be explained by a decrease in the probability these firms would obtain government assistance. In the last period we had hypothesised that there should be no difference in firm performance for the different classes of firms. The results in Table 7 show this to be the case, with none of the connection dummy variables being significantly different from zero. 5. Conclusions In their 2003 study, Johnson and Mitton found evidence that politically favoured firms outperformed unconnected firms in the period immediately after the imposition of capital controls. In this study, we considered not only firms with unofficial crony connections, but also firms with official links to government, government linked companies, and firms with some portion of government ownership, Khazanah firms. We had expected that firms with official links would not be as badly affected by withdrawal of the control measures as government could claim a national interest in supporting them. We also expected that they would not be affected by changes in government as their connections were not personally based. We found no evidence to support either of these hypotheses. We did find that at the start of the period Khazanah firms had higher leverage, were less liquid and less profitable than other firms, even after controlling for firm size and other factors. This may be attributed to an implicit government guarantee which increases their borrowing ability. The evidence for the value of crony connections is not nearly as strong as that found by Johnson and Mitton (2003). This is unsurprising, considering the more gradual and predictable nature of the changes in our study period. The evidence is strongest in the finance area. Politically favoured financial firms showed a relative decrease in value when the institutions set up to help financial firms (Danamodal and Danaharta) were wound up. This suggests political connections still had value, some of which was lost during this period, which was after Mahathir left office. Although all types of firms showed a decrease in value in the month following Mahathir's surprise resignation there was no significant difference for firms with political connections and those without, with the possible exception of financial firms which had previously been connected to Anwar. If there

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had been an expectation that Badawi would act to reduce cronyism, we would expect connected firms to decrease relatively more, so this result suggests little change was expected. This implication can be supported by comparing the membership of Mahathir's last cabinet with that of Badawi's first cabinet. We see only four new cabinet members in a 16 member cabinet and half the previous cabinet members retained the same portfolios, suggesting there would be little change to existing power structures. The value of political found in this study is not as great as found previously. One possible reason for this is that most of the events studied here were not as unexpected and dramatic as those the imposition of capital controls used by Johnson and Mitton (2003). A second explanation is that Badawi, as a new clean prime minister, made crony favouritism less politically acceptable. In summary, the evidence for the value of political connections is not nearly as strong that found by Johnson and Mitton (2003); however what we have found suggests that political connections, especially of the crony type, maintained at least some of their value during the transition from Mahathir to Badawi. Acknowledgments The authors would like to thank Prof. Richard Heaney, Dr. George Tawdros and two anonymous referees, whose comments have greatly improved this paper. Appendix A. Politically connected firms Data on unofficial political crony connections, called “Johnson and Mitton” here, is sourced from information in Table A1 of Johnson and Mitton (2003) based on Gomez and Jomo (1997). Government Linked Companies (GLCs) are defined as companies that have a primary commercial objective and in which the Malaysian Government has a direct controlling stake. Controlling stake refers to the Government's ability to appoint board members, senior management, make major decisions (e.g. contract awards, strategy, restructuring and financing, acquisitions and divestments etc) directly or through government linked investment companies. Officially listed GLCs serve on an advisory committee and are expected to act “responsibly” in the country's interest. The names of these companies were sourced from a media release from the Transformation Management, 2006 Office of 21st July 2006. Khazanah firm have some degree of government ownership through the government's investment arm Khazanah Nasional Berhad (KNB). These firms were identified through the KNB website.

Table A1 Company

Connection

Johnson and Mitton

Advance Synergy Advance Synergy Capital Affin Holdings AIC Amcorpgroup Antah Holdings Astro All Asia Networks Bandar Raya Dev. Berjaya Berjaya Sports Toto BIMB Holdings Bintulu Port Holdings Boustead Holdings BSA International Bumiputra-Commerce Hldg. Cement Inds. of Malaysia Chemical Malaysia CSM

Daim, Anwar Daim, Anwar

x x

Government linked company

Khazanah

x x UMNO Mahathir

x x

MCA Daim Daim

x x x

x

x x x x x x x Daim

x

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475

Table A1 (continued) (continued) Company

Connection

Johnson and Mitton

Cycle & Carr. Bintang Damansara Realty Drb-Hicom E & O Property Dev. Ecm Libra Edaran Otomobil Nasional Ekran

Daim UMNO

x x

Daim Unspecified

x x

Daim, Mahathir, Abdul Taib Mahmud UMNO

x

Faber Group Gold Bridge Engr.& Con. Golden Plus Holdings Guocoland (Malaysia) Halifax Capital Ho Hup Construction Hong Leong Bank Hong Leong Finl.Gp. Hong Leong Industries Hume Industries Mal. Idaman Unggul Java JT International KFC Holdings (Malaysia) Kretam Holdings Kumpulan Fima Kumpulan Guthrie Land & General Landmarks Magnum Malakoff Malayan Banking Malaysia Airports Hdg. Malaysia Building Soc. Malaysian Airline Sy. Malaysian Res. Media Prima Metroplex MISC Bhd. Multi-Purpose Holdings Mycom Naluri Nanyang Press Hdg. New Straits Times Press OYL Industries Pan Malaysia Capital Park May Pharmaniaga Plus Expressways Pos Mal.&Svs.Hdg. Prime Utilities Proton Holdings Rashid Hussain Sapura Technology Sime Darby Star Publication (Mal.) Tebrau Teguh Telekom Malaysia Tenaga Nasional TH Plantations Time Dotcom Time Engineering

Government linked company

Khazanah

x

x

x

x x

Anwar Anwar Anwar Daim Anwar Anwar Anwar Anwar Anwar Daim Daim Anwar Daim Daim

x x x x x x x x x x x x x x

Daim Daim Daim UMNO

x x x x

x

x

Daim Daim, Anwar UMNO Unspecified

x x x x

Daim Ghafar Baba Unspecified Anwar Anwar Anwar Daim

x x x x x x x

x x x x x

x x

x

Daim, Anwar

x

Daim Mahathir

x x

Daim Daim

x x

x

x x x x

x

x

x

x x x Daim

x

x x x x (continued on next page)

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Table A1 (continued) (continued) Company Tradewinds (Mal.) UDA Holdings UEM Builders UEM World UMW Holdings United Plantations Utusan Melayu (Malaysia) Wijaya Baru Global

Connection

Johnson and Mitton

Daim

x

Daim UMNO Daim, Mahathir, Abdul Taib Mahmud

x x x

Government linked company

x x

Khazanah x x x x

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