Do political connections affect the institutional ownership of firms? Evidence from Malaysia

Abstract

This study examines the effect of political connections on firms' ability to attract institutional equity capital in Malaysia. Based on a dataset of 865 Malaysian publicly listed firms comprising 16,190 firm-year observations from 2000 to 2022, we employ an ordinary least squares (OLS) model to examine the relationships between political connections and institutional ownership, including domestic institutional ownership, long-term institutional ownership and blockholding ownership. Politically connected firms (PCFs) attract significantly higher levels of institutional ownership, particularly from domestic and long-term institutional investors as well as blockholders who prioritise growth prospects and sustained performance. Furthermore, these effects are largely driven by government-linked companies (GLCs). The evidence indicates that institutional investors do not respond uniformly to all forms of political connections. The findings provide important guidance for firm managers in understanding how political ties influence access to external equity capital. They also offer insights for institutional investors in evaluating the trade-offs between potential benefits and governance risks associated with PCFs. The results provide policymakers with evidence on how political connections shape capital allocation in the Malaysian market. This may support policy reforms aimed at improving transparency, reducing political favouritism and strengthening investor protection mechanisms. This study advances the literature by examining how institutional investors interpret political connections through the lens of political economy and corporate governance. By resolving the tension between political protection and agency risk, it shows that political connections function as both strategic resources and informative signals in investment decisions. The focus on ownership heterogeneity further deepens understanding of institutional investment in emerging markets. Despite the costs associated with elite political ties, institutional investors systematically incorporate political considerations into their capital allocation decisions.