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Political connections, the cost of debt and board attributes: evidence from Malaysia

Political connections, the cost of debt and board attributes: evidence from Malaysia The purpose of this paper is to examine whether the relationship between politically connected firms (PCFs) and the cost of debt is moderated by board attributes such as audit committee independence, ethnic board diversity, gender board diversity and family controlling ownership.Design/methodology/approachThis study employs ordinary least squares model to examine the moderating effect of audit committee independence on the association between PCFs and the cost of debt; moderating effect of ethnic board diversity on the association between PCFs and the cost of debt; moderating effect of gender board diversity on the association between PCFs and the cost of debt; and moderating effect of family-controlled boards on the association between PCFs and the cost of debt.FindingsThe results show that PCFs are associated with lower cost of debt, consistent with crony capitalism theory. Furthermore, board attributes are shown to have significant moderating effect on the association between PCFs and the cost of debt. Specifically, the cost of debt in PCFs can be further reduced, provided the boards have higher audit committee independence, are ethnically diverse, have higher proportion of female directors in the board and audit committee and are controlled by family shareholders.Originality/valueThis study reveals evidence on the impact of board attributes on the cost of debt in PCFs. All findings suggest that concerns on PCFs’ severe agency problems can be alleviated through effective monitoring. The significant board attributes that facilitate effective monitoring are audit committee independence, ethnic board diversity, gender board diversity and family ownership. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Managerial Finance Emerald Publishing

Political connections, the cost of debt and board attributes: evidence from Malaysia

Managerial Finance , Volume 45 (7): 14 – Aug 8, 2019

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References (62)

Publisher
Emerald Publishing
Copyright
© Emerald Publishing Limited
ISSN
0307-4358
DOI
10.1108/mf-04-2018-0179
Publisher site
See Article on Publisher Site

Abstract

The purpose of this paper is to examine whether the relationship between politically connected firms (PCFs) and the cost of debt is moderated by board attributes such as audit committee independence, ethnic board diversity, gender board diversity and family controlling ownership.Design/methodology/approachThis study employs ordinary least squares model to examine the moderating effect of audit committee independence on the association between PCFs and the cost of debt; moderating effect of ethnic board diversity on the association between PCFs and the cost of debt; moderating effect of gender board diversity on the association between PCFs and the cost of debt; and moderating effect of family-controlled boards on the association between PCFs and the cost of debt.FindingsThe results show that PCFs are associated with lower cost of debt, consistent with crony capitalism theory. Furthermore, board attributes are shown to have significant moderating effect on the association between PCFs and the cost of debt. Specifically, the cost of debt in PCFs can be further reduced, provided the boards have higher audit committee independence, are ethnically diverse, have higher proportion of female directors in the board and audit committee and are controlled by family shareholders.Originality/valueThis study reveals evidence on the impact of board attributes on the cost of debt in PCFs. All findings suggest that concerns on PCFs’ severe agency problems can be alleviated through effective monitoring. The significant board attributes that facilitate effective monitoring are audit committee independence, ethnic board diversity, gender board diversity and family ownership.

Journal

Managerial FinanceEmerald Publishing

Published: Aug 8, 2019

Keywords: Cost of debt; Political connections; Audit committee independence; Ethnic board diversity; Gender board diversity and family-controlled boards

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