Institutional investors, political connections and stock recommendations from sell-side analysts: the case of Malaysia

Abstract

PurposeThe purpose of this study is to investigate the interplay between institutional investors' ownership (IIO), politically connected firms (POC) and sell-side analysts' stock recommendations (ASR).Design/methodology/approachThis study employs ordinary least square (OLS) regression to test the hypotheses. The sample comprises 280 Malaysian public listed companies (PLC) and encompasses the 2008–2013 time frame (a total of 735 observations).FindingsThe results show a significant and positive link between IIO and ASR. In addition, a negative association is found between POC and ASR. Moreover, the POC weakens the positive relationship between the IIO and ASR.Research limitations/implicationsOne important implication of this study is that political involvement in corporate decisions is a prominent characteristic of the Malaysian market, which can significantly affect the information environment and analysts' reactions.Practical implicationsThe findings of this study provide useful empirical guidance to the regulators in evaluating the efficacy of recent regulatory initiatives. Investors may also gain useful insights from this study, specifically in recognising the crucial monitoring role played by institutional investors and how politically patronised firms are viewed unfavourably by equity analysts.Originality/valueThis study is one of the first to examine the joint influence of IIO and POC, on ASR.