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Political connections, institutional investors monitoring and stock price synchronicity: Evidence from Malaysian firms

Chwee Ming Tee (Department of Accounting and Finance, School of Business, Monash University – Malaysia Campus, Bandar Sunway, Malaysia)

Managerial Finance

ISSN: 0307-4358

Article publication date: 13 November 2017

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Abstract

Purpose

The purpose of this paper is to examine the association between politically connected (POLCON) firms and stock price synchronicity, and whether this association can be attenuated by institutional investors.

Design/methodology/approach

This paper uses an ordinary least square regression model to examine the association between POLCON firms and stock price synchronicity; institutional ownership and stock price synchronicity; the moderating role of institutional ownership on the association between POLCON firms and stock price synchronicity; institutional domiciles and stock price synchronicity; and the moderating role of institutional domiciles on the association between POLCON firms and stock price synchronicity.

Findings

The result shows that POLCON firms are positively associated with stock price synchronicity. Further, the author also finds that institutional monitoring, through higher ownership by local institutional investors is associated with lower stock price synchronicity. In addition, this study documents evidence that institutional investors, particularly local institutional investors can improve stock price informativeness in POLCON firms.

Research limitations/implications

The results suggest that POLCON firms are plagued by severe agency problems, resulting in limited flow of firm-specific information to the capital markets. However, the author shows that POLCON firm’s agency problems can be attenuated through effective monitoring by institutional investors. Further, institutional domiciles are shown to be significantly associated with stock price synchronocity. However, effective monitoring is largely driven by local institutional investors, in line with the geographical proximity theory.

Practical implications

The results suggest that regulators should increase their surveillance and monitoring effort, particularly on firms with close ties to the government. In particular, POLCON firms should be required to be more transparent in their corporate dealings. Additionally, auditors should intensify their audit efforts on POLCON firm to provide more reliable financial information to minority shareholders, investors and analysts. Finally, institutional investors should be incentivized by the Malaysian Securities Commission, via, the code of governance to play an effective monitoring role in Malaysian firms.

Originality/value

This study reveals that POLCON firms’ severe agency problems can be alleviated by effective institutional monitoring. Further result identifies institutional domiciles as a significant factor in influencing monitoring effectiveness in POLCON firms. This paper provides insights into the dynamic interaction between political connections, institutional monitoring, firm governance and capital markets behavior of an emerging market.

Keywords

Acknowledgements

The authors acknowledge the helpful comments from one anonymous referee and seminar participants at the 2016 European Accounting Association Conference in Maastricht, the Netherlands.

Citation

Tee, C.M. (2017), "Political connections, institutional investors monitoring and stock price synchronicity: Evidence from Malaysian firms", Managerial Finance, Vol. 43 No. 11, pp. 1236-1253. https://doi.org/10.1108/MF-03-2017-0099

Publisher

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Emerald Publishing Limited

Copyright © 2017, Emerald Publishing Limited

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