The corporate risk-taking and performance of politically connected firms: evidence from Malaysia

Abstract

Purpose

One of the significant components of a firm's overall sustainability is establishing and nurturing governance. This study attempts to understand how politically connected firms maintain sustainability measures in terms of risk-taking strategies. This paper has two purposes. The first purpose is to provide empirical evidence on the politically connected (PC) firms' corporate risk-taking and performance. The second purpose is to investigate the moderating impact of PC firms' risk on corporate performance.

Design/methodology/approach

To conduct the analysis to test our hypothesis efficiently, data has been collected from Bloomberg and annual reports of all Malaysian PC and non-PC companies. The final sample comprises 561 firms over the investigation period 2010–2019. The methodology entails Ordinary Least Squares (OLS) regressions of the impact of the PC firms on corporate risk-taking and performance. The authors also conduct t-tests of the equality of means of corporate risk-taking and performance between PC and non-PC companies.

Findings

The authors’ results show that politically connected firms undertake significant less corporate risk and relish higher financial performance than their counterparts. It implicatively insinuates that the presence of a politician on the board enables the management to mitigate the risk-taking, which makes the firms more profitable. The authors’ results corroborate network theory, suggesting that political ties alleviate the agency issue and safeguard the shareholders' interest.

Research limitations/implications

The study's results were important as they highlighted the sustainable development of PC and non-PC companies, offering insights to researchers, policymakers, regulators, financial report users, investors, environmental unions, employees, clients and society.

Originality/value

This paper is novel since it is unique in evaluating sustainable practice in PC and non-PC firms.

Citation

Chin, A., Lye, O.C. and Najaf, K. (2024), "The corporate risk-taking and performance of politically connected firms: evidence from Malaysia", Asia-Pacific Journal of Business Administration, Vol. 16 No. 2, pp. 367-391. https://doi.org/10.1108/APJBA-07-2021-0315