IS POLITICAL CONNECTION ASSOCIATED WITH CORPORATE RISK-TAKING? MALAYSIAN EVIDENCE

Abstract

This study explores how political connection is associated with the corporate risk-taking of non-financial firms in Malaysia using the dataset from the years 2002 to 2017. The findings indicate that government ownership negatively influences corporate risk-taking, and this effect is more evident when the percentage of ownership is high. Meanwhile, other types of politically connected firms do not undertake higher corporate risk-taking, even when the connection is expected to generate more resources for these firms. Further analysis showed that firms connected via the family members of the leading politician to be negatively associated with risk-taking, indicating that a closer tie to the government’s top leadership inhibits risky investment choices. Our results contradict past literature where scholars showed that the establishment of connection increases a firm’s incentive to undertake higher corporate risk-taking. This contradiction suggests that the risk behavior of connected firms in emerging countries in Asia differs from those of developed countries and therefore, demands further investigation to improve our understanding of this underdeveloped topic.