Agency Costs as a Factor in the Suspension of Companies from the Kuala Lumpur Stock Exchange

Abstract

In 2001, the Malaysian Securities Commission decided to suspend poorly performing companies from trading on the Kuala Lumpur Stock Exchange (KLSE) and enacted a regulation referred to as Practice Note 4 (PN4). According to this regulation, if a company's shareholder equity is negative, if it receives a going concern qualification, or if a receiver is appointed, then KLSE could classify it as a PN4 company. Using a sample of 21 PN4 and 42 non-PN4 comparable companies over the period 2001–2004, this paper investigates the governance mechanisms, disclosures and financing strategies that identify the PN4 companies and studies the economic consequences of this regulation. The study finds that outsiders in PN4 companies incurred agency costs due to extremely high insider ownership and poor internal governance. The Malaysian institutional environment is used to discuss the reasons why the PN4 regulation fails to lower managerial agency costs.