Markets and politics : revealing state-business relation through financial market information

The phenomenon of crony capitalism is often described as the major cause of the Asian economic collapse in 1997. The main objective of this study is to address this phenomenon empirically through the structure of Malaysian political economy and tests the hypothesis that crony firms earn positive abnormal returns. There are claims that crony capitalism is widespread in the country. Since crony firms should earn positive abnormal returns as a result of regulatory changes, market information should reveal evidence of the existence of cronyism. This empirical research represents an effort to fill the research gap of the limited empirical study in crony capitalism, in particular and the understanding of Malaysian political economy in general. This study improves upon previous case studies in business-state relationship in Malaysia by utilizes publicly available data on daily stock prices instead of accounting data or corporate annual reports. The former is more reliable than the latter since providing misleading information is not unusual for firms or governments in developing countries. Three major political events in the past decade that greatly impacted economic policies in Malaysia are examined. This study finds that the portfolio consistently experienced statistically significant abnormal returns after some major political events or new policies were announced. The results suggest that political connectedness is one major factor affecting stock returns of firms in this portfolio.