Political connection and cost of debt: Some Malaysian evidence

Mark Anthony Gerard Bliss, Ferdinand A. Gul

Research output: Journal article publicationJournal articleAcademic researchpeer-review

147 Citations (Scopus)

Abstract

This paper investigates the association between Malaysian politically connected (PCON) firms and the cost of debt. We extend previous research that finds Malaysian PCON firms are perceived as being of higher risk by the market, and by audit firms, by providing evidence that lenders also perceive these firms as being of higher risk. We also find that PCON firms have a significantly (1) higher extent of leverage, (2) higher likelihood of reporting a loss, (3) higher likelihood of having negative equity, and (4) higher likelihood of being audited by a big audit firm. We suggest that PCON firms are charged higher interest rates by lenders as a result of efficient contracting given their higher inherent risks. Additionally, we find that CEO duality present in PCON firms is perceived by lenders as being more risky, and that a higher proportion of independent directors on the audit committee mitigate this perceived risk.
Original languageEnglish
Pages (from-to)1520-1527
Number of pages8
JournalJournal of Banking and Finance
Volume36
Issue number5
DOIs
Publication statusPublished - 1 May 2012

Keywords

  • Audit committees
  • CEO duality
  • Cost of debt
  • Political connection

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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