Family Firms, Expropriation and Firm Value: Evidencefrom Related Party Transactions in Malaysia

Liew Chee Yoong, Ervina Alfan, S.Susela Devi

The Journal of Developing Areas, Volume 49, Number 5, 2015 (SpecialIssue), pp. 139-152 (Article)

Published by Tennessee State University College of BusinessDOI: 10.1353/jda.2015.0048

For additional information about this article

Access provided by University Of Malaya (18 Oct 2015 13:00 GMT)

http://muse.jhu.edu/journals/jda/summary/v049/49.5.chee-yoong.html

T h e J o u r n a l o f D e v e l o p i n g A r e a s Special Issue on Kuala Lumpur Conference Held in August 2014

Volume 49 No. 5 2015

FAMILY FIRMS, EXPROPRIATION AND FIRM

VALUE: EVIDENCE FROM RELATED PARTY

TRANSACTIONS IN MALAYSIA

Chee Yoong, Liew

SEGi University, Malaysia

Ervina Alfan

University of Malaya, Malaysia S.Susela Devi

UNITAR International University, Malaysia

ABSTRACT

We examine the relationship between related party transactions (RPTs) and firm value and how this

relationship is moderated by ownership concentration using a sample of 379 listed family and 151

non-family firms for the period 2007 to 2009. Ordinary Least Square Pooled Model as well as Fixed

Effects Model panel data regressions are used in the data analysis. For family firms, we find that

RPTs reduce firm value (proxied by Tobin’s Q and market-to-book value). Further, controlling

shareholders’ ownership has a significant positive moderating effect on this relationship. However,

for non-family firms, there is no significant evidence of firm value reduction and positive moderating

effect respectively. We conclude that expropriation via RPTs is stronger in family firms compared to

non-family firms. Additionally, an increase in controlling shareholders’ ownership helps mitigate this

expropriation and this mitigating effect is stronger in family firms compared to non-family firms. The

implications for the capital market regulator are discussed in this paper.

Keywords: corporate governance, expropriation, family firms, agency problems

JEL Classification: G34

Corresponding Author’s Email: liewcheeyoong@segi.edu.my

INTRODUCTION

Generally, extant corporate governance literature focuses on the traditional shareholder-

manager Agency Problem Type I – principal-agent problem (De Cesari, 2012), prevalent

in widely held firms (Jensen and Meckling, 1976). However, in firms controlled by one or

more shareholders with large stakes (controlling firms), corporate insiders possess

incentives to pursue private benefits at the expense of outsider shareholders, resulting in

minority shareholder expropriation (De Cesari, 2012), known as Agency Problem Type II

– principal-principal problem, particularly prevalent in the emerging markets (Ahlstrom et

al., 2010). In these circumstances, family controlling shareholders assume control of most

businesses and are the incentivized to expropriate minority shareholders (Cueto, 2013).

However, reputational effects can mitigate this expropriation problem (Khanna and Yafeh,

2007). In emerging markets, these effects are deemed as poor substitutes for institutional

deficiencies (Peng and Jiang, 2010) because even firms with good reputation exploit

minority shareholders particularly during periods of financial crisis (Johnson et al., 2000).

140

Nevertheless, this line of reasoning is unconvincing in the context of corporate fiascos such

as the Transmile case in Malaysia1. These scandals resulted in strong remedial action by

the regulators post 2007. We believe, the reputational effect plays a significant role on

corporate governance of family firms. For that reason, we question whether reputational

effect is a poor substitute for institutional deficiencies.

There is still limited evidence on minority shareholder expropriation and Agency

Problem Type II (Bjuggren et al., 2011) particularly in emerging markets. Most

expropriation studies show the existence of expropriation but they offer very little

empirical evidence on how expropriation is conducted (Jiang et al., 2010).

Furthermore, there is limited evidence on the role of controlling shareholders’

ownership on the relationship between expropriation and firm value (Ahrens et al., 2011).

We investigate whether controlling shareholders’ ownership concentration moderates the

relationship between RPTs that are likely to result in expropriation and firm value. Prior

studies investigated the moderating role of other internal corporate governance

mechanisms on this relationship, but evidence on ownership concentration role is limited.

Therefore, this study investigates whether RPTs in Malaysia affect firm value and

whether controlling shareholders’ ownership moderates this relationship. The remainder of

this paper is organized as follows. Section 2 discusses the corporate governance

institutional context in Malaysia, evaluates the extant corporate governance literature and

develops the relevant hypotheses; Section 3 explains the research methodology; Section 4

discusses the findings and finally Section 5 discusses the implications of the findings.

Section 6 concludes.

INSTITUTIONAL SETTING, LITERATURE REVIEW

AND HYPOTHESES DEVELOPMENT

Malaysian Institutional Setting: Corporate Governance

Development and Regulatory Framework

A major post-1997 Asian financial crisis corporate governance reform in Malaysia was the

introduction of the Malaysian Code of Corporate Governance (MCCG) in 2000. This Code

was revised in 2007 and 2012. MCCG is considered largely ineffective in reducing

minority shareholder expropriation due its voluntary nature of adoption (Aguilera and

Cuervo-Cazurra, 2009). Intuitively, controlling shareholders in Malaysia may take this

opportunity to expropriate minority shareholders, even though, they are still required to

state in their annual reports the extent of their compliance, with an explanation for any

departure (Securities Commission, 2012). One of the ways controlling shareholders

expropriate minority shareholders is through RPTs.

Hypotheses Development

RPTs, Expropriation and Firm Value

RPTs are diverse complex business transactions between a company and its management

or owners (Gordon et al., 2004). Cheung et.al (2006) identify RPTs that are likely to result

141

in expropriation as asset acquisitions, asset sales, equity sales, trading relationships and

cash payments made to a related party. Although there are benefits of RPTs such as communication and contracting

efficiencies as well as reduction in holdup problems (Ryngaert and Thomas, 2007), these

transactions are more likely to result in negative effects on firm value because they are

perceived as mechanisms for controlling shareholders to extract resources from their firms

through tunnelling (Djankov et al., 2008). Two main institutional factors in Malaysia,

which incentivize expropriation by controlling shareholders through RPTs are: (i)

Malaysia’s political economy that encourages rent seeking, creating huge resources for

controlling shareholders to expropriate via RPTs (Searle, 1999); (ii) regulatory loopholes2

encourages expropriation through these channels (Thillainathan, 1999). The negative

effects of RPTs are arguably more severe and prevalent in family firms, where family

members are involved in the management, compared to non-family firms. Plausibly family

controlling shareholders possess incentives to enhance the interests of their family

members through related sales, related lending, loan guarantees and related borrowings

(Yeh et al., 2012). Hence, the following hypotheses are developed:

H1: There is a negative relationship between RPTs that are likely to result in expropriation

and firm value among Malaysian firms.

H2: The negative relationship between RPTs that are likely to result in expropriation and

firm value among Malaysian firms will be stronger in family compared to non-family

firms.

Moderating Effects of the Controlling Shareholder’s Ownership

Concentration, Expropriation and Firm Value

The role of ownership concentration on expropriation is important, particularly, in

emerging markets, due to the prevalence of high ownership concentration in these markets

(Morck and Yeung, 2003). In the Malaysian institutional and corporate governance

context, arguably post-Transmile, reputational concerns may play a role in positively

moderating family controlling shareholders’ ownership impact on expropriation.

Reputational concerns are prevalent amongst family owners of large family firms with high

equity stakes. These family owners are most likely cognizant of their reputational effect

post-Transmile. Transmile is a large family-owned Malaysian corporation that attracted

significant negative publicity and led to several amendments to the MCCG in 2007.

Arguably, the reputational effect works as follows: As the family owners’

shareholding increases, they have greater incentives to ensure their reputational capital by

reducing minority shareholder expropriation (Loy, 2010). Thus, reputational effect aligns

the family owners’ interests to those of minority shareholders, thus, reducing Agency

Problem Type II. Ultimately, this induces a positive moderating effect of controlling

shareholders’ ownership on the impact of controlling shareholders’ expropriation on firm

value. Hence, the following hypotheses arise:

H3: There is a positive moderating effect of the controlling shareholder’s ownership

concentration on the relationship between RPTs and firm value, among Malaysian firms.

H4: The positive moderating effect of the controlling shareholder’s ownership

concentration on the relationship between RPTs and firm value among Malaysian firms is

stronger in family compared to non-family firms.

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RESEARCH METHODOLOGY

Research Design

Sample

Secondary data related to the types of ultimate owner, financial information and board

statistics is used for the period 2007-2009. These period is chosen because family firm

reputational effect may be intensified post- Transmile case in 2006. The data is obtained

from companies’ annual reports or from Bloomberg database. A total of 379 public-listed

family firms are analysed. We define family firms as firms controlled by individuals or

families with at least 20% voting rights (Chakrabarty, 2009) as well with at least a family

member holding a managerial position (i.e. board member, CEO or chairman, chairman of

the syndicate pact) (Cascino et al., 2010). Additionally, a total of 151 public-listed non-

family firms are analysed. Table 1 explains the proxies used to measure the dependent

variables.

Variables Definition and Measurement

TABLE 1. DEPENDENT VARIABLES AND MEASUREMENT

No. Dependent

Variable

Measurement

1 Firm value

Proxy 1

(Market-based performance

measure)

Proxy is Tobin’s Q (Bai et al., 2003).

Tobin’s Q is measured by using the following ratio: (Total Market Value of

Equity + Total Book Value of Liabilities) / (Total Book Value of Equity + Total Book Value of Liabilities) (Anderson and Reeb, 2003).

2 Firm value

Proxy 2

(Market-based performance

measure)

The market to book value (MBV) is also used. MBV is calculated using the

following ratio: (The number of equity shares x The closing price of the stock

on the last day of the financial year) / Total Book Value of Equity (Reddy et al., 2010).

3 Return On Equity

(ROE)

Proxy 3 (Accounting-based

performance

measure)

Return on Equity (ROE) is used. ROE is measured as follows: Net Income /

Total Common Equity (Rechner and Dalton, 1991).

4 Return On Asset

(ROA) Proxy 4

(Accounting-based

performance measure)

Return on Asset (ROA) is used. ROA is measured as follows: Net Income /

Total Assets (Anderson and Reeb, 2003).

Table 2 explains the independent variables.

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TABLE 2. INDEPENDENT AND CONTROL VARIABLES AND

MEASUREMENT

Independent

Variable

Description

RPTs that are

likely to result

in

expropriation

(RPT)

The amount of RPTs that are likely to result in expropriation is used as per

the RPTs section disclosure in the annual report to measure RPTs. These

transactions are discerned from the type of RPTs based upon Cheung et.al

(2006)’s definition. This transaction value will be divided by the Total RPTs

value to reduce the number of outliers in the distribution.

Ownership

Concentration

(OC)

This is extracted from the data of the substantial shareholding in the annual

report. It is measured in terms of percentage of total equity held by the

largest shareholder (Demsetz and Lehn, 1985). In the context of Malaysian

annual reports, the substantial shareholding is calculated by summating the

direct and indirect shareholding of the largest shareholder.

Control

Variables

In line with prior corporate governance literature, we control for twelve

variables, namely,

(1) Firm size (SIZE);

(2) Firm risk (RISK);

(3) Leverage (LEV); and

(4) Proportion of independent directors (IDR);

(5) Firm age (AGE);

(6) Non-affiliated blockholders (NAB);

(7) Sales growth (SG);

(8) R&D expenditure-to-sales (RDS);

(9) Capital expenditure-to-sales (CS);

(10) Marketing and advertising expenditure-to-sales (MS) and

(11) Gross Domestic Product (GDP).

(12) Firm Type (for Pooled Model of family and non-family firms only)

Research Model

For hypotheses testing, Pooled Ordinary Least Square (OLS) regression model and the

Fixed Effects Model (FEM) are used. Panel data regression is conducted on family firms,

non-family firms and the pooled model (family and non-family firms). The research model

is as follows:

Family Firm Model and Non-Family Firm Model

1. Qit or MBVit or ROEit or ROAit = β0 + β1(RPT)it + β2(OC)it + β3(SIZE)it +

β4(RISK)it + β5(LEV)it + β6(IDR)it + β7(NAB)it + β8(AGE)it + β9(SG)it + β10(RDS)it

+ β11(CS)it + β12(MS)it + β13(GDP)it + β14(OC)it(RPT)it + µit

Pooled Model (Family and Non-Family Firms)

2. Qit or MBVit or ROEit or ROAit = β0 + β1(RPT)it + β2(OC)it + β3(SIZE)it +

β4(RISK)it + β5(LEV)it + β6(IDR)it + β7(NAB)it + β8(AGE)it + β9(SG)it + β10(RDS)it

+ β11(CS)it + β12(MS)it + β13(GDP)it + β14(OC)it(RPT)it + β15FTit + µit

144

Qit: Performance measured by Tobin’s Q at year t.

MBVit: Performance measured by Market-to-Book Value Ratio at year t.

ROEit: Performance measured by Return On Equity at year t.

ROAit: Performance measured by Return On Asset at year t.

RPTit: Amount of Related Party Transactions That Are Likely to Result in Expropriation

at year t divided by Total Related Party Transactions Value at year t.

OCit: Controlling shareholders’ ownership concentration in the firm at year t (%)

(OC)it (RPT)it: Controlling shareholders’ ownership concentration in the firm at year t

multiplied by the amount of related party transactions that are likely to result in

expropriation ratio at year t.

Control Variables

SIZEit: Firm Size (Ln (Total Assets)) at year t

RISKit: ln (Firm Risk (Standard Deviation of monthly stock returns from 2007-2009)) at

year t

LEVit: ln (Leverage (Long-term Debt/Total Assets)) at year t

IDRit: Independent Directors Ratio (No. of independent directors/Board Size) at year t

NABit: Non-affiliated Blockholder Shareholding at year t

AGEit: ln (Age) at year t

SGit: Sales Growth at year t

RDSit : Research and Development Expenditure-to-Sales at year t

CSit: Capital Expenditure-to-Sales at year t

MSit: Marketing and Advertising Expenditure-to-Sales at year t

GDPit3: Gross Domestic Product at year t

FTit: Firm type dummy variable at year t, 1 for family firms, 0 for non-family firms.

µit: Stochastic error term at year t

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DESCRIPTIVE STATISTICS, ENDOGENEITY ISSUES

AND RESEARCH RESULTS

Descriptive Statistics

TABLE 3. DESCRIPTIVE STATISTICS FOR FAMILY FIRMS

Descriptive Statistics For Full Sample

Family Firms

Mean Median Standard

Deviation

Maximum Minimum

Tobin’s Q 0.8780 0.7801 0.5226 7.0322 0.0631

ROE 0.0396 0.0688 0.3043 3.0037 -5.3488

ROA 0.0323 0.0386 0.0810 0.4117 -0.6432

Market-to-Book Value

(MBV)

0.8027 0.5849 1.0694 16.2962 -0.3955

Related Party

Transactions That Are

Likely To Result In

Expropriation Ratio

(RPT)

0.3285 0.1843 0.3528 0.9997 0.0000

Ownership Concentration 42.1420 41.1800 13.3102 99.1600 20.1800

Predicted Ownership

Concentration

42.0626 42.5332 1.5741 44.0562 34.4134

Firm Size 19.6350 19.4900 1.2024 24.4960 16.9470

Ln(Firm Risk) -2.2835 -2.3327 0.9758 1.2590 -5.3454

Leverage 0.1323 0.0885 0.1831 2.7988 0.0000

Independent Directors

Ratio

0.4240 0.4000 0.1135 0.8330 0.1820

Non-affiliated

Blockholders

27.2503 14.7600 38.9662 339.2600 0.0000

Ln(Age) 2.9626 3.0910 0.7287 4.6347 0.0000

Sales Growth 14.4226 6.4538 93.2761 2254.7070 -96.8719

R & D Expenditure-to-

Sales

0.1445 0.0000 1.8187 35.6826 0.0000

Capital Expenditure-to-

Sales

9.2843 3.6383 27.2080 561.4003 -37.0511

Marketing and

Advertising Expenditure-

to-Sales

2.3014 0.4010 4.0991 62.0660 0.0000

Gross Domestic Product 3.2172 4.8075 3.5006 6.4802 -1.6360

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TABLE 4. DESCRIPTIVE STATISTICS FOR NON-FAMILY FIRMS

Descriptive Statistics For Full Sample

Non-Family Firms

Mean Median Standard

Deviation

Maximum Minimum

Tobin’s Q 1.1582 0.8812 1.0831 11.3300 0.2553

ROE 0.0577 0.0889 1.0485 2.5277 -20.7650

ROA 0.0695 0.0563 0.5531 11.0594 -1.8846

Market-to-

Book Value

(MBV)

1.3298 0.7493 2.7994 34.8749 -2.4040

Related Party

Transactions

That Are

Likely To

Result In

Expropriation

Ratio (RPT)

0.1483 0.0000 0.2905 0.9955 0.0000

Ownership

Concentration

46.0735 48.4100 15.9517 89.6200 2.1000

Predicted

Ownership

Concentration 43.3272 43.9792 16.5626 49.5352 26.4726

Firm Size 20.1482 19.8880 1.4059 24.9910 16.3070

Ln(Firm Risk) 0.2876 0.1635 0.3615 2.7491 0.0063

Leverage 0.1257 0.0731 0.1403 0.6967 0.0000

Independent

Directors

Ratio

0.4283 0.4000 0.1166 0.8330 0.1430

Non-affiliated

Blockholders

55.2784 24.5630 82.9609 517.6300 0.0000

Ln(Age) 24.5828 21.0000 16.4803 118.0000 1.0000

Sales Growth 7.1040 4.8082 43.7810 418.1182 -87.1248

R & D

Expenditure-

to-Sales

0.0804 0.0000 0.4510 5.9684 0.0000

Capital

Expenditure-

to-Sales

7.7666 3.4241 15.1208 207.9674 0.0000

Marketing

and

Advertising

Expenditure-

to-Sales

3.3794 0.0000 7.1290 59.1911 0.0000

Gross

Domestic

Product

3.2172 4.8075 3.5006 6.4802 -1.6360

147

Tables 3 and 4 present the summary statistics of the continuous variables of the family firm

and non-family samples respectively. It can be seen that the average RPTs differs.

Endogeneity Test

We performed the Hausman Specification Test (Hausman, 1978) to investigate whether

endogeneity exists in that ownership maybe determined by firm value (Andres, 2008). An

instrumental variable (IV) (Gujarati and Porter, 2009), the predicted value of ownership

concentration, obtained by regressing the original ownership concentration values against

firm size, the square of firm size and firm risk (Himmelberg et al., 1999) provided a control

for endogeneity problem.

Research Results

For family firms, the regression results for the normal pooled Ordinary Least Square (OLS)

and Fixed Effect Model (FEM) show that RPTs that are likely to result in expropriation

significantly reduce firm value (Tobin’s Q and MBV) at 1% and 5% significance level.

When ownership concentration moderates the relationship between RPTs and firm value,

the firm value (Tobin’s Q and MBV) effects turns positive. This is significant at 5%

significance level. In the case of non-family firms, the regression results for the normal

pooled Ordinary Least Square (OLS) and Fixed Effect Model (FEM) show that RPTs that

are likely to result in expropriation do not have a significant relationship with firm value.

Additionally, ownership concentration has no significant moderating effect on the

relationship between RPTs and the firm value (market and accounting-based performance

measures). Tables 5.1 and 5.2 show the results for the pooled model of family and non-

family firms.

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TABLE 5.1. ACTUAL REGRESSION RESULTS (MAIN RESULTS): NORMAL

OLS REGRESSION POOLED MODEL (FAMILY FIRMS AND NON-FAMILY

FIRMS)

Independent

Variables

And

Intercept

Dependent Variable Independent

Variables

And

Intercept

Dependent Variable

Tobin’s Q MBV ROE ROA

Coeff. Coeff. Coeff. Coeff.

C 3.28535*** 1.76229** C -0.66407** -0.38398***

RPT -0.27300* -0.37271* RPT 0.58628 0.20580

OC -0.00098 0.00479 OC 0.02474** 0.01232***

SIZE -0.09031*** -0.01129 SIZE -0.00882 -0.00291

Ln (RISK) 0.14490*** 0.16193*** Ln (RISK) 0.04794*** 0.01200***

LEV 0.83806*** 0.20864 LEV -0.11039 -0.08362***

IDR -0.39727*** -0.38056 IDR -0.20432** -0.06568**

NAB -0.00097*** -0.00208*** NAB -0.00014 0.00001

Ln (AGE) 0.01790 0.01021 Ln (AGE) 0.00980 -0.00123

SG 0.00002 0.00011 SG 0.00010 0.00005**

RDS

-0.00092 -0.01355

RDS

0.00051 0.00261

CS -0.00010 0.00015 CS -0.00041 -0.00005

MS 0.00166 0.00145 MS 0.00119 0.00022

GDP -0.00282 -0.00403 GDP -0.00017 0.00107

OC x RPT 0.00692** 0.00943* OC x RPT -0.01450 -0.00480

FT -0.26530*** -0.52322*** FT 0.01410 0.00935

N 530 530 N 530 530

Adjusted R-

Squared (%)

10.7002 4.1747 Adjusted R-

Squared (%) 2.6220

4.9165

F-Statistic 13.6933*** 5.61501*** F-Statistic 3.85239*** 6.47751*** * 10% sig.level ** 5% sig.level *** 1% sig.level

149

TABLE 5.2. ACTUAL REGRESSION RESULTS (MAIN RESULTS): NORMAL

OLS REGRESSION FIXED EFFECTS MODEL (FAMILY FIRMS AND NON-

FAMILY FIRMS)

Independent

Variables

And

Intercept

Dependent Variable Independent

Variables

And

Intercept

Dependent Variable

Tobin’s Q MBV ROE ROA

Coeff. Coeff. Coeff. Coeff.

C 3.19063*** 1.39526 C -0.66807** -0.37544***

RPT -0.28794** -0.44297** RPT 0.58699 0.20522

OC -0.00049 0.00535* OC 0.02475** 0.01239***

SIZE -0.08919*** -0.00394*** SIZE -0.00881*** -0.00288***

Ln (RISK) 0.14193*** 0.16173 Ln (RISK) 0.04787 0.01186***

LEV 0.82743*** 0.18257 LEV -0.11023 -0.08475

IDR -0.35673** -0.29496*** IDR -0.20484** -0.06448**

NAB -0.00088*** -0.00188 NAB -0.00014 0.00001

Ln (AGE) 0.03632 0.09206 Ln (AGE) 0.00972 -0.00125

SG 0.00003 0.00011 SG 0.00010 0.00005**

RDS

-0.00180 -0.01542

RDS

0.00051 0.00265

CS -0.00009 0.00007 CS -0.00041 -0.00005

MS 0.00109 0.00099 MS 0.00119 0.00023

OC x RPT 0.00709** 0.01081** OC x RPT -0.01452 -0.00478

FT -0.25924*** -0.51212*** FT 0.01406 0.00934

N 530 530 N 530 530

Adjusted R-

Squared (%)

14.0572

8.5533 Adjusted R-

Squared (%) 2.5676

5.0621

F-Statistic 17.24405*** 10.28901*** F-Statistic 3.61714*** 6.29536*** * 10% sig.level ** 5% sig.level *** 1% sig.level

In the pooled model (family and non-family firms) results in Tables 5.1 and 5.2,

family firms possess a lower firm value (Tobin’s Q and MBV) compared with non-family

firms. This is significant at 1% significance level. In addition, in the pooled model (family

and non-family firms), the joint hypotheses of H0: βRPTs of family firms and βRPTs of non-family firms =

0 is rejected and has a significant negative relationship with firm value (Tobin’s Q and

MBV). This is significant at 5% and 10% significance level. Both these results coupled

with the significant negative relationship between RPTs and firm value (Tobin’s Q and

MBV) in the family firm regression results indicate that the negative relationship between

RPTs and firm value (Tobin’s Q and MBV) is stronger in family firms compared to non-

family firms. This is because the resulting lower firm value (Tobin’s Q and MBV) of family

firms in the pooled model (family and non-family firms) regression results is contributed

by the significant negative relationship between RPTs and firm value (Tobin’s Q and

MBV). Likewise, for the joint hypotheses of H0 : βOC x RPTs of family firms and βOC x RPTs of non-family

firms = 0, it can also be concluded that the significant positive moderating effect of

150

controlling shareholders’ ownership on the relationship between RPTs and firm value

(Tobin’s Q and MBV) is stronger in family firms compared to non-family firms. The

overall lower firm value (Tobin’s Q and MBV) of family firms in the pooled model (family

and non-family firms) indicates a stronger corporate reputational effects in family firms.

Additionally, we found that the main research results for family firms and non-

family firms (i.e. the effect of RPTs on firm value and the moderating effect of ownership

concentration on this relationship) are robust against industry effects. The significant

results are also restricted to Tobin’s Q and MBV.

IMPLICATIONS AND DISCUSSIONS

Overall, we observe that expropriation through RPTs occurs among Malaysian firms which

reduces firm value. All hypotheses are supported but only when firm value is proxied by

market-based performance measures. Expropriation via RPTs (which reduce Tobin’s Q

and MBV) is stronger in family compared to non-family firms within the Malaysian

institutional setting. Moreover, there is a significant positive moderating effect of

controlling shareholders’ ownership on the relationship between RPTs and firm value

among Malaysian firms.

.

CONCLUSIONS

We show that minority shareholder expropriation through RPTs exists amongst Malaysian

firms. Interestingly, we evidence that family firm reputational effect plays a role in

reducing minority shareholder expropriation in Malaysian family firms, particularly, in the

post-Transmile era. A new dimension to agency theory emerges - corporate reputational

effect. Our finding contradicts Peng and Jiang (2010)’s observation that reputational effects

is a poor substitute for institutional deficiencies in emerging markets. On the policy front,

we suggest the Securities Commission in Malaysia (SCM) take note that minority

shareholder expropriation exists amongst Malaysian public-listed firms. Further,

mitigation efforts by SCM on minority shareholder expropriation problems through RPTs

ought to focus on family rather than non-family firms and that SCM re-evaluate Part 8,

Para. 8.1-8.3 of the MCCG 2012 to ensure adequate protection of minority shareholder

rights. Lastly, future research could consider analysing the effects of legislation on

minority shareholder expropriation particularly in emerging markets.

ENDNOTES

1 The Transmile case occurred in late 2006. The firm’s revenue was inflated in the financial statement

(Securities Commission, 2011), denting the reputation of Malaysian family firms. Transmile was one

of the prominent family firms in Malaysia. 2 In Section 132C and 132E of the Malaysia Companies Act (1965) (Thillainathan, 1999) which was

later amended in 2007 through the Malaysia Companies (Amendment) Act (2007). However, the

regulatory loopholes still exist despite the amendments made in 2007 on the Companies Act. 3 GDP could only be included in the Pooled OLS Model and not the Fixed Effects Model due to near

singular matrix problems as well.

151

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