Does Foreign Ownership Improve Financial Constraints in Weak Corporate Governance Environment? Evidence from Malaysia

Abstract

The issues of financial constraints emphasis that firms use internal cash rather than debt or equity for investments. In a country where family controlled are prominent this could lead to distortion of capital and economy growth. Hence, over rely on internal financing lead firms to invest inefficiently particularly in family controlled firms where agency problem is severe. Moreover, the issues of weak corporate governance such as duality and relationship based independent directors prevail in family firms than non-family firms in emerging economy. In view of reduced investment in Malaysia during global financial crisis in 2008-2009, this study investigates family controlled firms and the issues of financial constraints conditional on corporate governance variables. Apparently, family firms rely on internal cash flow rather than external debt market for investments especially in firms with the presence of CEO’s Duality. The presence of foreign ownership mitigate Duality weaknesses and enhancing investment via internal cash and external debt financing. However, independent directors as governance mechanism is rather weak as firms utilise less debt for investments, while the presence of foreign ownership does not exert any governance effects to improve financial constraints situation, rather there are possibilities of expropriating for private benefits. The findings is consistent when applying sample firms with low cash flows. Lastly, the findings suggest the ineffectiveness of governance especially on the role of independent directors towards efficient investments in Malaysia.