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Political connection and cost of debt: Some Malaysian evidence
This paper investigates the association between Malaysian politically connected (PCON) firms and the cost of debt. We extend previous research that finds Malaysian PCON firms are perceived as being of higher risk by the market, and by audit firms, by providing evidence that lenders also perceive these firms as being of higher risk. We also find that PCON firms have a significantly (1) higher extent of leverage, (2) higher likelihood of reporting a loss, (3) higher likelihood of having negative equity, and (4) higher likelihood of being audited by a big audit firm. We suggest that PCON firms are charged higher interest rates by lenders as a result of efficient contracting given their higher inherent risks. Additionally, we find that CEO duality present in PCON firms is perceived by lenders as being more risky, and that a higher proportion of independent directors on the audit committee mitigate this perceived risk. © 2012.
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Journal
Journal of banking and financeVolume
36Issue
5Pagination
1520 - 1527Publisher
ElsevierLocation
Amsterdam, The NetherlandsPublisher DOI
ISSN
0378-4266eISSN
1872-6372Publication classification
C1.1 Refereed article in a scholarly journal; C Journal articleCopyright notice
2012, ElsevierUsage metrics
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