Ownership Structure, Financial Rent and Performance: Evidence from Malaysian Manufacturing Sector

Abstract

This paper addresses the interaction relationship between debt financing and ownership structure towards firms' value in Malaysia. Two issues are addressed in this study. The study examines whether managers and controlling large shareholders pursue rent seeking objective through excessive leverage in a firm. Secondly, the paper examines whether financial restraint policy is effective in enhancing corporate governance. The sample of the study covers a small economy - Malaysia where rent seeking opportunities prevail. A total 256 manufacturing firms are examined. The hypotheses are set to examine whether rent seeking prevails in firms with high intangible assets and less competitive industries. The findings show that first, financial restraint policy is only effective when managerial equity interest is relatively low. Managers with a higher equity interest hinder the positive effects driven by financial restraint policy. Second, at a higher threshold of equity interest, the use of excessive leverage by managers leads to a lower firm value, confirming the presence of rent seeking motive. The presence of the largest shareholder as directors also follows the same conjecture despite at a lower magnitude. Both findings could not be refuted in less competitive industries. Other findings from this paper conclude that a high industrial concentration industry increases firms' value in this economy. Financial institutions can also exert corporate governance on firms in less competitive industries. It is, however, the agency problem mitigates the positive effects brought forth by financial rent in this emerging economy.

Keywords: Ownership structure, capital structure, emerging economy, finance, Malaysia, rent seeking, industrial competition

JEL Classification: G30, G32