Article ID Journal Published Year Pages File Type
5084929 International Review of Financial Analysis 2014 12 Pages PDF
Abstract
This paper investigates the effect of political patronage on firms' capital structure. The evidence is from Malaysia, a country characterised by relationship-capitalism, and covers 1988 to 2009. Using a system GMM estimator we find firms set leverage targets and adjust towards them following deviations at the rate of 28% per annum. Next, we construct a natural experiment and use a difference-in-differences model to investigate if the strategic financing decisions of politically patronised firms differ from non-connected firms after an exogenous shock caused by the 1997 Asian crisis. Our results unambiguously demonstrate a significant difference in the capital structure of patronised firms relative to non-connected firms following the exogenous shock but only for the crisis period 1998-2001. After 2002 the capital structures of patronised and non-connected firms are statistically equivalent.
Related Topics
Social Sciences and Humanities Economics, Econometrics and Finance Economics and Econometrics
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