Cronyism

Abstract: The initial impact of the Asian financial crisis in Malaysia reduced the expected value of government subsidies to politically favored firms. Of the estimated $60 billion loss in market value for politically connected firms from July 1997 to August 1998, roughly 9% can be attributed to the fall in the value of their connections. Firing the Deputy Prime Minister and imposing capital controls in September 1998 primarily benefited firms with strong ties to Prime Minister Mahathir. Of the estimated $5 billion gain in market value for Mahathir-connected firms during September 1998, approximately 32% was due to the increase in the value of their connections. The evidence suggests Malaysian capital controls provided a screen behind which favored firms could be supported.

Abstract: The initial impact of the Asian financial crisis in Malaysia reduced the expected value of government subsidies to politically favored firms. Of the estimated $60 billion loss in market value for politically connected firms from July 1997 to August 1998, roughly 9% can be attributed to the fall in the value of their connections. Firing the Deputy Prime Minister and imposing capital controls in September 1998 primarily benefited firms with strong ties to Prime Minister Mahathir. Of the estimated $5 billion gain in market value for Mahathir-connected firms during September 1998, approximately 32% was due to the increase in the value of their connections. The evidence suggests Malaysian capital controls provided a screen behind which favored firms could be supported.

Abstract: This paper tests the proposition that politicians and their affiliated firms (i.e., firms operating in their province) temporarily suppress negative information in response to political incentives. We examine the stock price behavior of Chinese listed firms around two visible political events—meetings of the National Congress of the Chinese Communist Party and promotions of high-level provincial politicians—that are expected to asymmetrically increase the costs of releasing bad news. The costs create an incentive for local politicians and their affiliated firms to temporarily restrict the flow of negative information about the companies. The result will be fewer stock price crashes for the affiliated firms during these event windows, followed by an increase in crashes after the event. Consistent with these predictions, we find that the affiliated firms experience a reduction (an increase) in negative stock return skewness before (after) the event. These effects are strongest in the three-month period directly preceding the event, among firms that are more politically connected, and when the province is dominated by faction politics and cronyism. Additional tests document a significant reduction in published newspaper articles about affected firms in advance of these political events, suggestive of a link between our observed stock price behavior and temporary shifts in the listed firms’ information environment.