Political connections and income smoothing: Evidence of institutional investors’ monitoring in Malaysia

Abstract

This study explores the association between politically connected firms (PCFs) and income smoothing. Using a Malaysian dataset from 2002 till 2015, this study finds that PCFs are more likely to engage in income smoothing activity, in comparison with non-PCFs. Further, smoothing income in PCFs is encouraged by institutional investors, as it is perceived as an attempt to convey useful private information to investors. However, the moderating effect of institutional investors are largely driven by domestic institutional investors. This study extends prior literature on income smoothing, by suggesting that political connection is a key determinant in engaging in income smoothing activity, particularly in countries where crony capitalism and political patronage is deeply entrenched.