THE IMPACT OF GOVERNMENT-LINKED INVESTMENT COMPANIES IN MALAYSIA ON THE PERFORMANCE AND EARNINGS-MANAGEMENT OF THEIR PORTFOLIO COMPANIES

Abstract

Research into the impact of government ownership on the financial performance and earnings-management of listed companies typically makes the assumption that the government is a monolithic entity and fails to consider that government ownership rights are usually administered by different types of government organisations. This thesis comprises two empirical studies to investigate whether the existence of different government investment organizations in Malaysia (called government-linked investment companies or GLICs,) which have differing objectives and control structures, also have different results in terms of performance and earnings-management. The portfolio companies that GLICs manage are known as government-linked companies (GLCs).

The first empirical project explores the impact of GLC ownership structure (relating to the different group of GLCs, GLICs ownership concentration in GLCs, the existence of golden-share provisions and the presence of senior civil servants and of politicians on the boards of directors of GLCs) in terms of corporate performance as measured by accounting and market data. Using panel data of GLCs listed on the Main Board of Bursa Malaysia between 2004 and 2008, we provide evidence that in Malaysia the impact of government ownership on the financial performance of government-controlled listed companies varies depending on the type of organization managing the government’s ownership stakes.

In the second empirical project, we investigate the impact of ownership structure (ownership types, blockholders and managerial ownership) on earnings-management practices of listed companies on the Main Board of Bursa Malaysia. This involved 2696 firm-year observations between 2004 and 2008. We provide evidence that firms in our sample indeed managed their reported earnings upward; firms controlled by private blockholders engage in earnings-management practices at a higher magnitude than GLCs controlled by government blockholders. Between the GLCs, we found no evidence of the impact of different GLICs had on GLCs earnings-management practices.

This research is of interest to policy makers such as government, GLICs or regulators. In addition, the findings from both empirical projects are of potential interest to portfolio investment companies and minority or foreign investors who might either benefit from the presence of blockholders or might be exploited by their power to pursue self-interested objectives rather than shareholders’ value.