Ming and Gal have an interesting study on the behavior and monitoring of politically connected firms in Malaysia. There three main findings are that politically connected firms
- have lower earnings quality
- "are not subject to market discipline despite reporting poor accounting quality"
- where both board members and institutional investors are from matters. Specifically:
"when we consider ethnicity, we obtain
evidence to suggest that poor earnings quality in PCON firms are more prevalent in boards
dominated by Malay/Bumiputera directors as opposed to boards dominated by nonMalay/Bumiputera
directors. We also document evidence that PCON firms are not penalized
by the capital markets despite poor earnings quality. Interestingly, agency problems in PCON
firms can be mitigated through monitoring by institutional investors, particularly local
Now if they can get around the chicken or the egg problem (are earnings quality low before connections--and hence connections are used to shield their lack of quality, or as a result of the connections.
Will get mentioned in class!
'via Blog this'