Institutional Monitoring, Political Connection and the Cost of Debt: Evidence from Malaysia

Abstract

In this paper, we examine the main and joint effects of institutional monitoring and politically connected (PCON) firms on the cost of debt. Based on a sample of 1,565 firm-year observations for the period 2005-2010, we provide evidence that (1) institutional ownership (IO) is associated with lower cost of debt, and (2) institutional ownership attenuates the positive association between PCON firms and the cost of debt. When we split IO into local and foreign institutional investors, we find that it is the local IO, and not foreign IO that leads to lower cost of debt and attenuates the association between PCON firms and the cost of debt. Overall, our results suggest that IO, particularly local IOs, can alleviate agency problems in PCON firms through active monitoring and contributes to a better understanding of the monitoring role of institutional investors in Malaysian firms.