Cash holdings, political connections, and earnings quality: Some evidence from Malaysia

Abstract

Purpose

The purpose of this paper is to investigate the influence of cash holding, political connection and their interaction effect on earnings quality in the Malaysian environment, where political influence plays a vital role in many aspects of business dealings and resources allocation is seriously affected by politics.

Design/methodology/approach

This paper uses ordinary least square and seemingly unrelated regressions upon a sample of the Malaysian top 100 listed firms.

Findings

This paper finds that earnings of firms with excess cash reserves are of high quality. Consistent with previous research, the study finds that investors perceive earnings numbers of politically connected firms as being of low quality. However, this research fails to support an expectation that the adverse consequences of holding a large amount of cash to earnings quality would be more pronounced when political extraction is high. The findings of this study suggest that policy makers should encourage or mandate firms to disclose information in relation to their connections with government, political party, or politicians so that investors and all interested parties can use the information to better assess the firms’ earnings quality.

Originality/value

This research is considered as the first attempt to examine the relationships between cash holdings, political connections, and earnings quality in a developing country such as Malaysia.

Citation

Al-dhamari, R. and Ku Ismail, K.N.I. (2015), "Cash holdings, political connections, and earnings quality: Some evidence from Malaysia", International Journal of Managerial Finance, Vol. 11 No. 2, pp. 215-231. https://doi.org/10.1108/IJMF-02-2014-0016