The Influence Of Political Connection, Business Group, And Ownership On The Relationship Between Diversification And Firm Value
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Date
2016-10
Authors
Lee, Kian Tek
Journal Title
Journal ISSN
Volume Title
Publisher
Universiti Sains Malaysia
Abstract
The notion of informal institutions in influencing the norm and practices of corporate governance in emerging markets such as Malaysia seems to stand out in its role in breeding conglomerates. In general, Malaysian publicly listed firms rely on the informal institutional constraints more than the formal rules in conducting their business activities in the absence of an effective regulatory environment. From the past research studies on firm diversification, agency theory alone has been the central theoretical framework to explain how corporate governance profoundly influences the firm value of diversification activities, but using an unitary theoretical perspective will provide a biased view in the context of an emerging market. Thus, it has become the impetus for the present study to adopt a multi-theoretic approach which is more appropriate in the context of Malaysia to examine the influence of corporate governance on the relationship between diversification and firm value. Using an unbalanced panel consists of all publicly listed companies excluding financial services firms on the Main Board of Bursa Malaysia between 2001 and 2012, this study examines how political connection, business group affiliation, ownership concentration, and the identity of the largest shareholders exert an influence on the diversification and firm value nexus. The regression analysis shows that diversification is negatively associated with firm value. The evidence in this study implies that Malaysian market generally does not respond well to firm diversification. In the further analysis, the firm value of a diversified firm is found to
be detrimental with politically connected directors as well as chairman, and also with higher ownership concentration. This implies that the agency cost brought by the politically connected board or chairman has outweighed the potential benefits of political networking as support of resource based view. Ownership concentration also exerts more agency problem than mitigating them. On the contrary, group-affiliated firms, especially with larger business group affiliation, are able to generate more common benefits than costs from their diversification undertaking. In addition, this study also found that a diversified firm who has a government-ultimate-owner will have higher firm value as compared to a similar diversified firm who is family-controlled. These findings are in support of resource based view.
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Keywords
The notion of informal institutions in influencing , the norm and practices of corporate governance