Market response towards different types of politically connected firms during political events: evidence from Malaysia
International Journal of Managerial Finance
ISSN: 1743-9132
Article publication date: 30 April 2020
Issue publication date: 19 January 2021
Abstract
Purpose
This paper investigates the market responses towards four types of politically connected (PCON) firms during two political events – general election and change of leader in Malaysia.
Design/methodology/approach
The authors capture the market response using cumulative abnormal return and further test it using regression analysis. The authors use a sample of 376 politically connected (PCON) and non-politically connected (non-PCON) firms from 2002 to 2013.
Findings
The market reacted negatively towards government-linked companies (GLC) during both events, showing that GLCs are negatively perceived by the market during political instability. On the other hand, the reaction of the market towards firms connected by businessmen does not differ from other firms. When compared to the findings of past literature, it shows the decreasing influence that businessmen have over the government leader. In further analysis, this study finds firms that are connected to the incoming government leader recorded a higher CAR as compared to firms connected to the outgoing government leader.
Practical implications
The authors’ study offers several practical implications. Knowing how the market responds to the different types of political connections might prove beneficial to investors. With this information, investors can recognize stocks with potential returns before the event date and may consider buying or selling them to capture a short-term profit. The authors’ findings may also have important implications for the management of PCON firms in terms of implementing an effective risk management and asset allocation plan to safeguard their value during political events that may disrupt the stability of their firms.
Originality/value
This paper provides an insight on how the markets have a different perception towards different types of politically connected firms during short-run political events. Past studies usually categorize political connection into a single category. With this separation, the authors are able to see how their individual CAR differs from other types of PCON.
Keywords
Acknowledgements
We thank the reviewer for the valuable comments and suggestions. The first author would like to acknowledge the Institute of Postgraduate Studies, Universiti Sains Malaysia for the USM Fellowship.
Citation
Wong, W.-Y. and Hooy, C.-W. (2021), "Market response towards different types of politically connected firms during political events: evidence from Malaysia", International Journal of Managerial Finance, Vol. 17 No. 1, pp. 49-71. https://doi.org/10.1108/IJMF-09-2019-0331
Publisher
:Emerald Publishing Limited
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