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

Abstract

Purpose

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/approach

This 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.

Findings

The 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/value

This 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.

Citation

Tee, C.M. (2019), "Political connections, the cost of debt and board attributes: evidence from Malaysia", Managerial Finance, Vol. 45 No. 7, pp. 842-855. https://doi.org/10.1108/MF-04-2018-0179