Corporate Performance of Malaysian Public Companies

Corporate Performance of Malaysian Public Companies1.0 Introduction and motivation of studyThe introduces of self-possession and corporate governance fetch been discussed broadly in the prior writings peculiarly in developed grocery stores. However, in emerging economies like Malaysia, the ph oneness numbers received a vigorous impetus when the Asiatic Financial Crisis (AFC) hit Malaysia with severity in 1997/98. The AFC had depressed the economy to damaging 7.5% in 1998, around 84,000 people lost their job and Malaysian capital foodstuff lost estimated USD200 billion in term of market capitalization during the crisis (Series of Malaysia Economic Reports). At the analogous time, the value of Malaysian currency had been decrease dramatically from 2.52 ringgit to the US dollar in June, 1997 to a lowest of 4.50 ringgit to the US dollar in January, 1998 (Tourres, 2003), plunging the country into its first recession for many years.Weak financial systems, excessive immaterial borrowing and lack of transp arncy were among factors that contributed to the crisis (Fischer, 1998). Following the AFC, the Malaysian regimen introduced several reform measures to enhance transp arncy and accountability to restoring market confidence and encourage to a greater extent stable and long term international coronation. Example of these are the establishment of the Malaysian Institute of Corporate administration (MICG) in 1998, the introduction of Malaysian enactment of Corporate institution (MCCG) in March 20001which codified the principles and best practices of good governance and the launched of Malaysias Capital Market Master Plan in 2002 as a comprehensive plan that identifies the strategic positioning and future of the Malaysian capital market. The Minority Shareholders Watchdog GROUP (MSWG) was also actup in 2001 as oppose to the AFC.This study focuses on Malaysias capital market mainly because of the confidence sh avouch by the international business commun ity concerning investitures in Malaysia curiously after the economy has in full aged from the AFC. Based on The Productivity and Investment Climate Survey, World Bank 2009, which reports wholes perceptions of the business environment, suggests that Malaysia is a relatively attractive place for investors. Meanwhile, Report on Doing Business 2010 ranked Malaysia 23rd come reveal of the clo bunch of 183 economies for ease of doing business and recently the World Competitiveness Score identity card 2010 placed Malaysia 10th of the most competitive economy in the world, up from 18th place in the earlier year.The achievement of Malaysia economy to date partly contributing through the active roles plays by the political science-linked companies (GLCs) that form the sand of the social organization of the Malaysian economy. GLCs and their softenling shareholders, authorities-linked investment companies (GLICs), constitute a probatory part of the economic social organisation of M alaysia. GLCs employ an estimated 5% of the national workforce, account for almost 49% of market capitalization (Ringgit Malaysia 235.5 billion) of Bursa Malaysia Securities, contributes about 17 percent of the nations gross fixed capital formation and account for almost 10 percent of receipts Domestic Product (Malaysia Economic Report, 2009/2010). More than that, GLCs also plays an eventful role in executing government policies and initiatives especially in key sectors and new produce sectors. Even with active divestment and privatization, GLCs remained as the main service providers to the nations key strategic utilities and services including electricity, telecommunications, airlines, airports, public transportations, banking and financial services.On top of that, GLCs also on capitulum in implementing recommendations of the best practices af potented in Malaysian recruit of Corporate establishment for Malaysian Public Listed Companies (Corporate politics Survey Report, 2 008). In the meantime, Corporate Governance Watch 2007, an whizness-year collaborative study of corporate governance landscape of Asiatic market undertaken by independent stockbroker CLSA Asia Pacific Markets and the Asian Corporate Governance Association noted general improvement at the GLCs, a function of GLCs reforms and greater openness. Finally, the research on GLCs implementation in Malaysia is also very meaning(a) in order to look into the real achievement of GLCs Transformation Program, the special program that was launched in May 2004 by Malaysian government to improve the surgical procedure of GLCs. Recently, the heart and soul shareholder return of a plectron of top 20 GLCs, has outperformed the benchmark index of Kuala Lumpur Composite Index (KLCI) by a compounded yearly harvest-time rate of 2.4 percent since the launch of the program (Business Times, 2009).Motivate by the above reason, part of this study attempts to examine whether or not government self- o vercome hire to better teleph unrivalledr transaction by focusing on the unique characteristics of government self- control condition in GLCs. The research is an attempt to extend the books in this field and to provide new insight and understanding on the roles of read in emerging market considering the limited number of research in this area. Hence, the first part of this study attempts to answer the following primary research questionIs t hither(predicate) any of import relationship betwixt causeership structure of government- linked companies in Malaysia and slopped value?2.0 Theoretical Foundations of the StudyThere are number of different theoretical frameworks to explain and analyze corporate governance. dis akinity frameworks approaches corporate governance in different way, for example the agency theory arises from the fields of finance and economics and the stakeholder theory arises from social-orientated perspective on corporate governance. concord to Mallin (2 010, p.14), the main theories that get to affected the development of corporate governance are agency theory, transaction cost economics, stakeholder theory and stewardship theory. All these theory from difference disciplines come contributed to the development of theoretical aspects of corporate governance and its frameworks. However, the main theory that generally associated with will power of the unfaltering is agency theory that widely used in preliminary researches around the world.Theoretical and empirical researches on the relationship amid ownership and bulletproof value was originally motivated by the separation of ownership from reassure (Berle Means, 1932) and more recently, by agency theory (Jensen Meckling, 1976 Fama Jensen, 1983). In this theory, the basic assumption is that the goals and objectives of the principals (owners) and autobuss (agents) conflict. The central problem in corporate governance is to construct rules and incentive to efficaciously a lign the behavior of motorbuss with the desires of principals (Hawley and Williams, 1996). The problem of agents being responsible to principals is that it compounds the agency costs identified by Jensen and Meckling (1976) with the basic assumption is that managers will act opportunistically to further their own interests before shareholders and one of the main reasons that the desired actions of principal and agent diverge is their different attitude towards risk (Shankman, 1999).Under the circumstances, in Malaysia where thither is a last school concentration of government ownership in homes (tam-o-shanter and Tan, 2007) and high percentage of firms affiliated to government (La Porta et al., 1999), the government ownership actually has capacity to provide a control mechanisms to align focusing personal objectives with firm objectives and eventually increase the firm value.Parts of GLCs in Malaysia are privatized firms during Malaysian Privatization Policy in 1990s. Hence, th e firms invariably connect to political inconsistents and in that stance the political view of GLCs conceive that the high level of government interferences resulted of inefficiency to the firm rather than facilitate the operation.3.0 Literature canvas and Research GapsIn Malaysia context, GLCs are defined as companies that find a primary commercial objective and in which the Malaysian government has a set irresponsible stake via the GLICs. The GLICs are investment arms of the government that allocate government funds to the GLCs (Putrajaya Committee on GLC High Performance, 2004 Lau and Tong, 2008). Meanwhile, the coercive stake here refers to the governments ability (not just percentage ownership) to appoint visiting card members, senior focusing and/or make major endings. The Ministry of Finance (1993) classify GLCs as one in which the Malaysian government had an rigive ownership interest of at least 20 percent of equity shares. Twenty percent voting rights in one par ticular play along is considered to be sufficient for offspringive control and is use in previous studies on ownership (La Porta et al.,1999 Faccio et.al., 2001 and Setia-Atmaja, 2009). Majority of GLCs under the national appointed official government are under Khazanah Nasional Berhad, one of the most active GLICs in Malaysia2.Empirical studies on the relationship between government ownership and firm accomplishment on the whole produced inconclusive results. Study by Ang and Ding (2005) on the relationship between ownership structure of Singaporean GLCs and instruction execution implant that GLCs process higher valuations than those of the non-GLCs. In a link study, Ke and Issac (2007) report that governments shareholding is positively related to to corporate operation of chinawares listed property companies, suggested that the economy sector is matter in the country. The findings moreover inconsistent with other empirical studies on the government ownership in c hinaware where in overall be the detrimental relationship between these twain varyings. For example, Sun and Tong (2003) McGuiness and Ferguson (2005) Gunasekarage, Xu and Wang (1999) and Li, Sun and Zou (2009) find that on average, the firms functioning is negatively influenced by the governments ownership.Research in Malaysia on the relationship between government ownership and achievement is lacking and also show mixed findings. Recently, Lau and Tong (2008) conducted a research on the bear upon of government intervention on firm value by utilise 15 listed GLCs under Khazanah Nasional Berhad from year 2000 to 2005 (90 firm-year observations). They reveal a substantive positive relationship between the score of government ownership and firm value. However, this study has shortcomings as the selected data sets of 15 GLCs a year under Khazanah Nasional Berhad are too small and not stout enough to represent the overall GLCs mathematical operation. In fact, there are many more listed GLCs under the controlled of federal government GLICs3as well as GLCs under the enunciate government jurisdiction. This research aims to address this issue by providing in-depth examinations and comprehensive study on all GLCs both at federal and order level.In a related study in Malaysia, tam and Tan (2007) find that the mental process of firms associated to government ownership is poor compared to others ownership casings namely individual-owned firms, impertinent-owned firms and trust fund-owned firms. The study tough the top 150 listed companies on Bursa Malaysia Securities ground on their ranking according to their market capitalization in 2000. The connatural results also found in research by Ming and Gee (2008) and Chu and Cheah (2006) that show the negative relationship between government ownership and firms corporate carrying into action. However, those studies also shake limitations as they fail to properly identify the unique characteristics of GLC s ownership in Malaysia. In their studies, they group together all casings of GLCs in one group in an attempt to find its relationship to functioning without addressing issues of (i) the different type of GLCs controlled by federal government and GLCs controlled by raises government and (ii) the different type of shares in GLCs.With regard to the first issue, distinctions should be made between GLCs controlled by federal government (GLCFGs) and those controlled by state governments (GLCSGs) predominantly because they are difference in aspects of monitoring by federal government machineries and GLICs.GLCFGs subjected to strict inspection and monitoring not only by its GLICs but by ministries concerned under federal government. For example, Tenaga Nasional Berhad, a GLCFG is the largest electric utility ships gild in Malaysia with one governments special share and majority of it habitual shares owned by Khazanah Nasional Berhad . The Ministry of Finance responsible to the issue s pertaining to the corporate matters of the company such as the approval entity for appointment of CEO/board of conductors, their beseech extension or termination, company writ of execution etc. The survival of the fittest of company chairman or CEO is care fully chosen base on their capability and suitability to enquiry the organization. In the meantime, matters pertaining to policy such as approval for electric tariff increment and monitoring of company obeying to energy policy of Malaysia are under the obligation of Ministry of Energy, Green Technology and Water as a guardian ministry. In addition, National Audit Department also conducting an annual auditing or special auditing to this company to be reported in Auditors General Report that eventually to be presented in Parliament. Furthermore, Public Accounts Committee, a committee under Parliament also bind right to canvas whatever issues surrounding the company such as mismanagement or issues highlighted in Auditors Ge neral Report. With all these stringent monitoring systems, the GLCFGs are more cautious in their actions and eventually blend in to good corporate surgical procedure in the long run.On the other hand, the extent of monitoring and management of GLCSGs by respective state governments is weaker. All issues pertaining GLCSGs are to be monitor and solve by State Economic Development Corporation (SEDC), a controlling agency cum main shareholder of GLCSGs. As contended in Agency Theory, lack of monitoring efforts will increase the agency costs that eventually lead to poor firm exploit.Furthermore, GLICs at federal government switch more systematically systems and incentives in monitoring and improve its GLCs public presentation compared to its counterpart in state government. For example is the establishment of a special program aims to transform GLCs to high performers entity called GLCs Transformation Program (GTP) that was launched in May 2004. Under this program, 20 larger GLCs ( G-20) that controlled by different federal government GLICs has been selected to be transformed into high performance entity and become regional or global champions. Since the launch the programme, G-20 carry made epochal improvement especially on their financial aspects with operating coin in flow for non-financial G-20 firms grew by 42% from RM14 billion in 2004 to RM20 billion in 2008. At the same time, aggregate earnings for 2008 also 53% higher compared to performance in 2004 and sum shareholder returns has outperformed the benchmark index of Kuala Lumpur Composite Index (KLCI) by a compounded annual offshoot rate of 4.8% since the launch of the program (GTP Mid-Term Progress critique, 2009). With regard to this issue, based on above motivations the current study argue that the performance of listed GLCs controlled by federal government are better than it counterparts under the controlled of state government.On the second issue, previous studies with concerned to governm ent ownership and performance have ignored the very important characteristic of GLCs in Malaysia which is GLCs with governments one special share or golden share. As a background, to stimulate economic developing and reduce Government financial burden, privatization policy was introduced in 1983 and a lot of government entities as well as hundreds of government projects had been implemented by tete-a-tete sector. From 1983 until 2003, 474 projects and 457 government entities had been privatized from 1983 until 2005 involving assets sale of RM1.54 billion and equity sales of RM4.94 billion (Economic Planning Unit, Prime Minister Department). Various type of privatization such as sale, leased, management shrink and build-lease-transfer have been used. However, in close to strategic entities such as ports, main utilities provider (e.g. Tenaga Nasional Berhad) and national carrier (Malaysian Airlines Systems Berhad), Malaysian government formly retained one special share or well kn own as golden share on top of familiar shares that possess by GLICs on behalf of the government. In this type of GLCs, the arcdegree of Government interference is excessively. The golden share grant government not only right to control companys direction including the appointment/ inflammation of Chairman, Board member, CEO and senior management but also make major conclusions such as restructuring exercise, mergers and acquisition, assets disposal and even cancel whatever decision make by the firms for the interest of government5by the government in 2001 with cost closed to Ringgit Malaysia one billion (Jalleh M., 2005) was a good example of how this type of GLCs being protected by the government. Another prominent case was the bailout of national car company Perusahaan Otomobil Nasional or Proton by state-owned oil company, Petroliam Nasional Berhad (known as Petronas) during the AFC through cash injected by instruction of the government (Restall, 2000). Based on the arguments, the present study believed that, this type of firms should be treated separately from other normal GLCs to moderate the doctor of government interventions. By group them together into one group of GLCs as carried out by previous studies in Malaysia is inappropriate and may have twisted their studies result.This research basically will address both of these issue by differentiate all GLCs in Malaysia into groups according to their controlling agency at federal or state level and also based on their type of shares to observe their blow to firms corporate performance. This study expected to form a classifiable contribution to the knowledge and provide new facts on around elements of the government ownership in emerging economies by providing in-depth analysis on the issue. To the best of my knowledge, no particular researcher so far focuses on examining government ownership and firm value by make use of these proposed approaches. In addition to that, others variable that related t o government ownership such as the role of politicians, government official and ex- government officials as board members in GLCs and also the influence of degree of government ownership in GLCs will also be tested.4.0 Hypotheses developmentThis present study ultimately intended to test for any association between ownership structures of GLCs and firm value. A total of seven aspects have been identified and the hypotheses developed as to their probable effect and firm performance.4.1 GLCs under federal and state government and firm performanceThere were not studies specifically relate this variable with performance in Malaysia, but study by Chen, Firth and Xu (2009) on chinas listed company revealed that the performance of State Owned Enterprises (SOEs) affiliated to central government or in Malaysian context is federal government is outperformed their counterpart which are related to state and local government. They also argued that different form of government ownership have diff erent motivation and objectives on investment and it lead to different performance outcomes for the companies they have invested in. agree to Loh (2008), the Malaysias constitutional design clearly favors the federal over the state governments, both in term of legislative jurisdictions as well as in terms of revenue assignments. Based on this argument and motivations on the effectiveness of monitoring systems by federal government as discussed in 3.0, the proposed assumption isH1 The uphold of GLCs controlled by federal government on firm performance is stronger than GLCs controlled by states government4.2 GLCs with governments special share and firm performanceAs explained in Section 3.0 above, governments golden share providing the government will unlimited power to control company directions and sometimes lead to misallocation of resources by the companies itself or by the government in order to assist them. The holding agency of this share is Ministry of Finance Incorporated, the entity under Ministry of Finance, Malaysia.Although there is no empirical study so far that investigate the relationship between governments special share and performance in Malaysia, but study by Sun, Tong H.S, and Tong (2002) from chinawares privatization experience shows that too much government interference and control of state-owned enterprises (SOEs) was among the reasons of SOEs poor performance. Another argument is that, as of the perspective of minority shareholders, too much intervention from government will jeopardize the companys development and resulted poor performance in the long run. Hence, this type of company is not attractive for investors. Therefore, it is hypothesized thatH2 The impact of GLCs without governments golden share on firm performance is stronger than GLCs with governments golden share4.3 dot of government ownership and firm performance same many others East Asian countries, Malaysias corporate sector also experiencing a high level of ownership concentration (Liew, 2007 La Porta et al., 1998). Gunasekarage et. al (2006) in their study on influence of the degree of state ownership on the performance of listed Chinese companies give over that firms performance is remarkable at high levels of government ownership and a balanced ownership structure enhances the firm performance. Study by Ke and D.Isaac (2007) in China listed property companies from 2000 to 2002 also reveals that the government shareholding is positively related to corporate performance. In Malaysia context, Lau and Tong (2008) in their study of 15 listed GLCs in Bursa Malaysia for the period of 2000 to 2005 find a epochal positive relationship between the degree of government ownership6and firm value. However, this study has limitation in term of selected data sets as laid out in Section 3.0. Therefore the variable will be re-testing with more comprehensive data sets in order to have more concrete and big-shouldered severalise on the influence of this va riable to firm performance. In line with agency theory that concentrated ownership in more effective in reducing managerial agency cost, the proposed hypotheses areH3 There is a significant relationship between governments ownership degree in GLCs and firm performance4.4 Politicians as theater director and firm performanceGLCs traditionally has some of its boards of directors that had affiliations with the ruling party especially those GLCs that previously under government control and later on refer in privatization. Johnson and Mitton (2003) noted that as of October 1999, 15.8% or 67 out of 424 firms listed on the Main Board of Bursa Malaysia Securities are politically connected to the ruling party. Empirical try on the association between politicians as director and its impact to firm value is inconclusive. Study by Xu, Zhu and Lin (2005) on state owned enterprises in China revealed that politicians have incentives to control the firms to achieve economically inefficient object ives for political purposes. In a related study, Shleifer and Vishny (1994) exposed that excess employment and wages are gross in public enterprise that control by politicians. This unhealthy phenomenon could lead to wrong managerial investment decisions and result in misallocation of companys resources that eventually reduce the firm value. Boubakri, Cosset and Saffar (2008) investigate the association between political connections of newly privatized firms and the impact to performance. The study involved 245 privatized firms in 27 developing and 14 industrialized countries and the conception of political connections is based on whether the particular firms have a politician or an ex-politician on their boards. They find that the politically-connected firms process a poor performance compared to their non-connected counterparts. The similar result also found in Fan et. al (2007). Meanwhile, Fisman (2001) in his study in Indonesia and Faccio (2006) in analysis of 47 countries fi nd a significant relationship between these devil variables. In the context of Malaysia where business and politics are inter-related (Gomez and Jomo, 1997) indicated that, participation of politicians in GLCs might have effects on firm value as they act as a link between the governments and companys management. Therefore, it is hypothesized that,H4 There is a significant relationship between politician as director and firm performance4.5 Government officials as board member in GLCs and firm performanceGLCs are created partly to implement government policy objectives especially those established as a result of privatization exercises in the early eighties. Hence, most of their board of directors are civil servants any still in-service or formal government officials that act as eyes and ear of government as well as communication bridge between the management and the government. Agrawal and Knoeber (2001) in their study found that the politically experience directors that comprises former government officials benefits the company they served and noted that they are more prevalent in firms compare to others outside directors. In a related study in Singapore that involved 25 GLCs and 204 non-GLCs for the period from 1990 to 2000, Ang and Ding (2006) found that GLCs exhibit higher valuations than those of the non-GLCs in the area of profitability, efficiency and firms financial performance. analogous Malaysian GLCs, Singapore GLCs also comprises government officials in their board. At such, it is hypothesized that,H5 There is a significant relationship between in service government official as director and firm performanceH6 There is a significant relationship between former government official as director and firm performance5.0 Research design and methodology5.1 Data and sample designThe first computer simulation in this research is designed to examine the impact of ownership structure on corporate performance of all GLCs listed on the main board of Bursa Mal aysia Securities for the period of five years (2004 until 2008). To ensure that the sample clearly cor move the population intended for the research and to harmonious the selected sample to the GLCs definition, the sample selection is based on the following criteriaAt any time, one specific GLICs both at federal or states government level must be the single largest shareholder with at least 20% share ownership in one particular company on Main Board of KLSE andThe financial and unit trust companies are excluded as they are governed by different set of rules and acts that could affect the end findings of this study. In addition, all required financial data for the study period are to be available in databases (Datastream or Thomson Research) and study on ownership and corporate governance structure from companies respective audited annual report.The study constructs an unbalanced panel data of all GLCs during the study period. This approach has the gain of attrition biases in cor relation (Hu and Izumida, 2008). The observations period of 2004 to 2008 is chosen mainly because the period was the phase of economic stability in Malaysia when the countrys economy and capitals market activities fully cured after the Asian Financial Crisis. The performance chart in Figure 2 below reveals that prior to AFC, the Kuala Lumpur Composite Index (KLCI) in average has been work in an upward trend. However, the AFC push down the KLCI to below 600 during the peak of the crisis. The post-crisis period has seen steady increase in the value of the KLCI even though until 2006 Bursa Malaysia Securities still has some 200 companies transaction at more than 50 percent discount to their book values (James, 2006). Another reason for the chosen period is to evaluate the impact of GLCs Transformation Program that launch in May 2004 by Malaysian government to improve performance of GLCs.5.2 Methodology5.2.1 The proposed amazeThe following base model will be used to test the hypothe ses that have been defined in the previous sectionPERFORM = + 1FG_GLC + 2SG_GLC + 3GOLD + 4GOV_OWN + 5POL + 6GO_BOD + 7EX-GO_BOD + 8LOG_SIZE + 9LEV + 10BOD_SIZE + 11BOD_MEET + 12BOD_IND + iWherePERFORM = the dependent variables proxy by ROA, ROE and Tobins QIndependent variablesFG_GLC = GLCs under federal government(equal to 1 if a firm is under federal government, and 0 otherwise)SG_GLC = GLCs under state government(equal to 1 if a firm is under states government, and 0 otherwise)GOLD = GLCs which government owned one golden share(equal to 1 if a firm has governments golden share, and 0 otherwise)GOV_OWN = captures the percentage of government ownership in a GLCPOL = captures the percentage of politician on the boardGO_BOD = captures the percentage of government official in-service on the boardEX-GO_BOD = captures the percentage of ex-government official on the boardControl variablesLOG_SIZE = natural log of total assets as proxy of firm sizeLEV = firm leverage (total liabilities to total assets)BOD_SIZE = number of board of directors during the yearBOD_MEET = number of board of directors meetings during the yearBOD_IND = captures the percentage of independent directors on the boardi = error term5.2.2 Operationalization of variable selection5.2.2.1 The dependent variableThe dependent variable in this study is firm performance that comprises accounting and market based performance namely return on assets (ROA)8and Tobins Q. They are to be employed in this study to measure the impact of ownership structure on corporate performance. The accounting-based performance is the most parking area types of performance measurement in assessing business performance. In this approach, annual report, which comprises income statements, balance sheets and statements of changes in financial position are the source of development to analyze companys financial performance for one particular financial year. This approach is very important for companys stakeholders such as pote ntial investors since the indicator can help them in making investment decisions. It also vital in helping the companys shareholders to assess how well the company performed in market place in order to make decisions on management and employees rewards, setting suitable plans to sustain the good momentum or even take drastic approaches for company to remain in business. The accounting-based performance also helps manager to effectively plan and control in order to achieve the objectives of the company. For example, according to Thompson Yeung (2001), return on equity as one of the accounting-based measurements can accommodate the effect of different accounting procedures across industries and can minimize the multi-linearity between companys specific characteristics such as size, age and profitability.Both ROA and ROE are the most roughhewn measurement used in analyzing financial performance of companies and have been used widely in previous studies (Vafeas,1999 Abdullah,2004 Bha gat Black, 2002 Rahman Haniffa 2006 Ang Ding, 2006 Bhagat Bolton 2008 and Chu, 2009).Since accounting-based performance measures the past and current performance of the firm, mCorporate Performance of Malaysian Public CompaniesCorporate Performance of Malaysian Public Companies1.0 Introduction and motivation of studyThe issues of ownership and corporate governance have been discussed broadly in the prior literature especially in developed markets. However, in emerging economies like Malaysia, the issues received a vigorous impetus when the Asian Financial Crisis (AFC) hit Malaysia with severity in 1997/98. The AFC had depressed the economy to negative 7.5% in 1998, around 84,000 people lost their job and Malaysian capital market lost estimated USD200 billion in term of market capitalization during the crisis (Series of Malaysia Economic Reports). At the same time, the value of Malaysian currency had been decrease dramatically from 2.52 ringgit to the US dollar in June, 1997 to a lowest of 4.50 ringgit to the US dollar in January, 1998 (Tourres, 2003), plunging the country into its first recession for many years.Weak financial systems, excessive foreign borrowing and lack of transparency were among factors that contributed to the crisis (Fischer, 1998). Following the AFC, the Malaysian government introduced several reform measures to enhance transparency and accountability to restoring market confidence and encourage more stable and long term international investment. Example of these are the establishment of the Malaysian Institute of Corporate Governance (MICG) in 1998, the introduction of Malaysian Code of Corporate Governance (MCCG) in March 20001which codified the principles and best practices of good governance and the launched of Malaysias Capital Market Master Plan in 2002 as a comprehensive plan that identifies the strategic positioning and future of the Malaysian capital market. The Minority Shareholders Watchdog GROUP (MSWG) was also setup in 200 1 as respond to the AFC.This study focuses on Malaysias capital market mainly because of the confidence shown by the international business community concerning investments in Malaysia especially after the economy has fully recovered from the AFC. Based on The Productivity and Investment Climate Survey, World Bank 2009, which reports firms perceptions of the business environment, suggests that Malaysia is a relatively attractive place for investors. Meanwhile, Report on Doing Business 2010 ranked Malaysia 23rd out of 183 economies for ease of doing business and recently the World Competitiveness Scoreboard 2010 placed Malaysia 10th of the most competitive economy in the world, up from 18th place in the previous year.The achievement of Malaysia economy to date partly contributing through the active roles plays by the government-linked companies (GLCs) that form the pricker of the structure of the Malaysian economy. GLCs and their controlling shareholders, government-linked investmen t companies (GLICs), constitute a significant part of the economic structure of Malaysia. GLCs employ an estimated 5% of the national workforce, account for around 49% of market capitalization (Ringgit Malaysia 235.5 billion) of Bursa Malaysia Securities, contributes about 17 percent of the nations gross fixed capital formation and account for almost 10 percent of clear Domestic Product (Malaysia Economic Report, 2009/2010). More than that, GLCs also plays an important role in executing government policies and initiatives especially in key sectors and new growth sectors. Even with active divestment and privatization, GLCs remained as the main service providers to the nations key strategic utilities and services including electricity, telecommunications, airlines, airports, public transportations, banking and financial services.On top of that, GLCs also on brain in implementing recommendations of the best practices affirmed in Malaysian Code of Corporate Governance for Malaysian P ublic Listed Companies (Corporate Governance Survey Report, 2008). In the meantime, Corporate Governance Watch 2007, an annual collaborative study of corporate governance landscape of Asian market undertaken by independent stockbroker CLSA Asia Pacific Markets and the Asian Corporate Governance Association noted general improvement at the GLCs, a function of GLCs reforms and greater openness. Finally, the research on GLCs performance in Malaysia is also very important in order to investigate the real achievement of GLCs Transformation Program, the special program that was launched in May 2004 by Malaysian government to improve the performance of GLCs. Recently, the total shareholder return of a selection of top 20 GLCs, has outperformed the benchmark index of Kuala Lumpur Composite Index (KLCI) by a compounded annual growth rate of 2.4 percent since the launch of the program (Business Times, 2009).Motivate by the above reason, part of this study attempts to examine whether or not go vernment ownership lead to better company performance by focusing on the unique characteristics of government ownership in GLCs. The research is an attempt to extend the literature in this field and to provide new insight and understanding on the roles of state in emerging market considering the limited number of research in this area. Hence, the first part of this study attempts to answer the following primary research questionIs there any significant relationship between ownership structure of government- linked companies in Malaysia and firm value?2.0 Theoretical Foundations of the StudyThere are number of different theoretical frameworks to explain and analyze corporate governance. remnant frameworks approaches corporate governance in different way, for example the agency theory arises from the fields of finance and economics and the stakeholder theory arises from social-orientated perspective on corporate governance. According to Mallin (2010, p.14), the main theories that hav e affected the development of corporate governance are agency theory, transaction cost economics, stakeholder theory and stewardship theory. All these theory from difference disciplines have contributed to the development of theoretical aspects of corporate governance and its frameworks. However, the main theory that generally associated with ownership of the firm is agency theory that widely used in previous researches around the world.Theoretical and empirical researches on the relationship between ownership and firm value was originally motivated by the separation of ownership from control (Berle Means, 1932) and more recently, by agency theory (Jensen Meckling, 1976 Fama Jensen, 1983). In this theory, the basic assumption is that the goals and objectives of the principals (owners) and managers (agents) conflict. The central problem in corporate governance is to construct rules and incentive to effectively align the behavior of managers with the desires of principals (Hawley a nd Williams, 1996). The problem of agents being responsible to principals is that it compounds the agency costs identified by Jensen and Meckling (1976) with the basic assumption is that managers will act opportunistically to further their own interests before shareholders and one of the main reasons that the desired actions of principal and agent diverge is their different attitude towards risk (Shankman, 1999).Under the circumstances, in Malaysia where there is a high concentration of government ownership in firms (Tam and Tan, 2007) and high percentage of firms affiliated to government (La Porta et al., 1999), the government ownership actually has capacity to provide a control mechanisms to align management personal objectives with firm objectives and eventually increase the firm value.Parts of GLCs in Malaysia are privatized firms during Malaysian Privatization Policy in 1990s. Hence, the firms constantly related to political variables and in that stance the political view of G LCs conceive that the high level of government interferences resulted of inefficiency to the firm rather than facilitate the operation.3.0 Literature Review and Research GapsIn Malaysia context, GLCs are defined as companies that have a primary commercial objective and in which the Malaysian government has a direct controlling stake via the GLICs. The GLICs are investment arms of the government that allocate government funds to the GLCs (Putrajaya Committee on GLC High Performance, 2004 Lau and Tong, 2008). Meanwhile, the controlling stake here refers to the governments ability (not just percentage ownership) to appoint board members, senior management and/or make major decisions. The Ministry of Finance (1993) classify GLCs as one in which the Malaysian government had an effective ownership interest of at least 20 percent of equity shares. Twenty percent voting rights in one particular company is considered to be sufficient for effective control and is employed in previous studies on ownership (La Porta et al.,1999 Faccio et.al., 2001 and Setia-Atmaja, 2009). Majority of GLCs under the federal government are under Khazanah Nasional Berhad, one of the most active GLICs in Malaysia2.Empirical studies on the relationship between government ownership and firm performance on the whole produced inconclusive results. Study by Ang and Ding (2005) on the relationship between ownership structure of Singaporean GLCs and performance found that GLCs exhibit higher valuations than those of the non-GLCs. In a related study, Ke and Issac (2007) report that governments shareholding is positively related to corporate performance of Chinas listed property companies, suggested that the economy sector is matter in the country. The findings just inconsistent with other empirical studies on the government ownership in China where in overall found the negative relationship between these two variables. For example, Sun and Tong (2003) McGuiness and Ferguson (2005) Gunasekarage, Xu a nd Wang (1999) and Li, Sun and Zou (2009) find that on average, the firms performance is negatively influenced by the governments ownership.Research in Malaysia on the relationship between government ownership and performance is lacking and also show mixed findings. Recently, Lau and Tong (2008) conducted a research on the impact of government intervention on firm value by employed 15 listed GLCs under Khazanah Nasional Berhad from year 2000 to 2005 (90 firm-year observations). They reveal a significant positive relationship between the degree of government ownership and firm value. However, this study has shortcomings as the selected data sets of 15 GLCs a year under Khazanah Nasional Berhad are too small and not robust enough to represent the overall GLCs performance. In fact, there are many more listed GLCs under the controlled of federal government GLICs3as well as GLCs under the state government jurisdiction. This research aims to address this issue by providing in-depth examin ations and comprehensive study on all GLCs both at federal and state level.In a related study in Malaysia, Tam and Tan (2007) find that the performance of firms associated to government ownership is poor compared to others ownership types namely individual-owned firms, foreign-owned firms and trust fund-owned firms. The study involved the top 150 listed companies on Bursa Malaysia Securities based on their ranking according to their market capitalization in 2000. The similar results also found in research by Ming and Gee (2008) and Chu and Cheah (2006) that show the negative relationship between government ownership and firms corporate performance. However, those studies also have limitations as they fail to properly identify the unique characteristics of GLCs ownership in Malaysia. In their studies, they group together all types of GLCs in one group in an attempt to find its relationship to performance without addressing issues of (i) the different type of GLCs controlled by federa l government and GLCs controlled by states government and (ii) the different type of shares in GLCs.With regard to the first issue, distinctions should be made between GLCs controlled by federal government (GLCFGs) and those controlled by state governments (GLCSGs) predominantly because they are difference in aspects of monitoring by federal government machineries and GLICs.GLCFGs subjected to strict supervision and monitoring not only by its GLICs but by ministries concerned under federal government. For example, Tenaga Nasional Berhad, a GLCFG is the largest electric utility company in Malaysia with one governments special share and majority of it ordinary shares owned by Khazanah Nasional Berhad . The Ministry of Finance responsible to the issues pertaining to the corporate matters of the company such as the approval entity for appointment of CEO/board of directors, their contract extension or termination, company performance etc. The selection of company chairman or CEO is caref ully chosen based on their capability and suitability to go the organization. In the meantime, matters pertaining to policy such as approval for electric tariff increment and monitoring of company obeying to energy policy of Malaysia are under the indebtedness of Ministry of Energy, Green Technology and Water as a guardian ministry. In addition, National Audit Department also conducting an annual auditing or special auditing to this company to be reported in Auditors General Report that eventually to be presented in Parliament. Furthermore, Public Accounts Committee, a committee under Parliament also have right to investigate whatever issues surrounding the company such as mismanagement or issues highlighted in Auditors General Report. With all these stringent monitoring systems, the GLCFGs are more cautious in their actions and eventually lead to good corporate performance in the long run.On the other hand, the extent of monitoring and supervision of GLCSGs by respective state go vernments is weaker. All issues pertaining GLCSGs are to be monitor and solve by State Economic Development Corporation (SEDC), a controlling agency cum main shareholder of GLCSGs. As contended in Agency Theory, lack of monitoring efforts will increase the agency costs that eventually lead to poor firm performance.Furthermore, GLICs at federal government have more systematically systems and incentives in monitoring and improve its GLCs performance compared to its counterpart in state government. For example is the establishment of a special program aims to transform GLCs to high performers entity called GLCs Transformation Program (GTP) that was launched in May 2004. Under this program, 20 larger GLCs (G-20) that controlled by different federal government GLICs has been selected to be transformed into high performance entity and become regional or global champions. Since the launch the programme, G-20 have made significant improvement especially on their financial aspects with opera ting cash flow for non-financial G-20 firms grew by 42% from RM14 billion in 2004 to RM20 billion in 2008. At the same time, aggregate earnings for 2008 also 53% higher compared to performance in 2004 and total shareholder returns has outperformed the benchmark index of Kuala Lumpur Composite Index (KLCI) by a compounded annual growth rate of 4.8% since the launch of the program (GTP Mid-Term Progress Review, 2009). With regard to this issue, based on above motivations the current study argue that the performance of listed GLCs controlled by federal government are better than it counterparts under the controlled of state government.On the second issue, previous studies with concerned to government ownership and performance have ignored the very important characteristic of GLCs in Malaysia which is GLCs with governments one special share or golden share. As a background, to stimulate economic growth and reduce Government financial burden, privatization policy was introduced in 1983 a nd a lot of government entities as well as hundreds of government projects had been implemented by personal sector. From 1983 until 2003, 474 projects and 457 government entities had been privatized from 1983 until 2005 involving assets sale of RM1.54 billion and equity sales of RM4.94 billion (Economic Planning Unit, Prime Minister Department). Various type of privatization such as sale, leased, management contract and build-lease-transfer have been used. However, in some strategic entities such as ports, main utilities provider (e.g. Tenaga Nasional Berhad) and national carrier (Malaysian Airlines Systems Berhad), Malaysian government directly retained one special share or well known as golden share on top of ordinary shares that possess by GLICs on behalf of the government. In this type of GLCs, the degree of Government interference is excessively. The golden share grant government not only right to control companys direction including the appointment/ chemise of Chairman, Board member, CEO and senior management but also make major decisions such as restructuring exercise, mergers and acquisition, assets disposal and even cancel whatever decision make by the firms for the interest of government5by the government in 2001 with cost closed to Ringgit Malaysia one billion (Jalleh M., 2005) was a good example of how this type of GLCs being protected by the government. Another prominent case was the bailout of national car company Perusahaan Otomobil Nasional or Proton by state-owned oil company, Petroliam Nasional Berhad (known as Petronas) during the AFC through cash injected by instruction of the government (Restall, 2000). Based on the arguments, the present study believed that, this type of firms should be treated separately from other normal GLCs to moderate the impact of government interventions. By group them together into one group of GLCs as carried out by previous studies in Malaysia is inappropriate and may have twisted their studies result.This res earch basically will address both of these issue by differentiate all GLCs in Malaysia into groups according to their controlling agency at federal or state level and also based on their type of shares to observe their impact to firms corporate performance. This study expected to form a distinctive contribution to the knowledge and provide new facts on some elements of the government ownership in emerging economies by providing in-depth analysis on the issue. To the best of my knowledge, no particular researcher so far focuses on examining government ownership and firm value by make use of these proposed approaches. In addition to that, others variable that related to government ownership such as the role of politicians, government official and ex- government officials as board members in GLCs and also the influence of degree of government ownership in GLCs will also be tested.4.0 Hypotheses developmentThis present study ultimately intended to test for any association between owner ship structures of GLCs and firm value. A total of seven aspects have been identified and the hypotheses developed as to their probable effect and firm performance.4.1 GLCs under federal and state government and firm performanceThere were not studies specifically relate this variable with performance in Malaysia, but study by Chen, Firth and Xu (2009) on Chinas listed company revealed that the performance of State Owned Enterprises (SOEs) affiliated to central government or in Malaysian context is federal government is outperformed their counterpart which are related to state and local government. They also argued that different form of government ownership have different motivation and objectives on investment and it lead to different performance outcomes for the companies they have invested in. According to Loh (2008), the Malaysias constitutional design clearly favors the federal over the state governments, both in term of legislative jurisdictions as well as in terms of revenue assignments. Based on this argument and motivations on the effectiveness of monitoring systems by federal government as discussed in 3.0, the proposed conjecture isH1 The impact of GLCs controlled by federal government on firm performance is stronger than GLCs controlled by states government4.2 GLCs with governments special share and firm performanceAs explained in Section 3.0 above, governments golden share providing the government will unlimited power to control company directions and sometimes lead to misallocation of resources by the companies itself or by the government in order to assist them. The holding agency of this share is Ministry of Finance Incorporated, the entity under Ministry of Finance, Malaysia.Although there is no empirical study so far that investigate the relationship between governments special share and performance in Malaysia, but study by Sun, Tong H.S, and Tong (2002) from Chinas privatization experience shows that too much government interference and co ntrol of state-owned enterprises (SOEs) was among the reasons of SOEs poor performance. Another argument is that, as of the perspective of minority shareholders, too much intervention from government will jeopardize the companys development and resulted poor performance in the long run. Hence, this type of company is not attractive for investors. Therefore, it is hypothesized thatH2 The impact of GLCs without governments golden share on firm performance is stronger than GLCs with governments golden share4.3 stagecoach of government ownership and firm performanceLike many others East Asian countries, Malaysias corporate sector also experiencing a high level of ownership concentration (Liew, 2007 La Porta et al., 1998). Gunasekarage et. al (2006) in their study on influence of the degree of state ownership on the performance of listed Chinese companies conclude that firms performance is significant at high levels of government ownership and a balanced ownership structure enhances the firm performance. Study by Ke and D.Isaac (2007) in China listed property companies from 2000 to 2002 also reveals that the government shareholding is positively related to corporate performance. In Malaysia context, Lau and Tong (2008) in their study of 15 listed GLCs in Bursa Malaysia for the period of 2000 to 2005 find a significant positive relationship between the degree of government ownership6and firm value. However, this study has limitation in term of selected data sets as laid out in Section 3.0. Therefore the variable will be re-testing with more comprehensive data sets in order to have more concrete and robust evidence on the influence of this variable to firm performance. In line with agency theory that concentrated ownership in more effective in reducing managerial agency cost, the proposed hypotheses areH3 There is a significant relationship between governments ownership degree in GLCs and firm performance4.4 Politicians as director and firm performanceGLCs tradition ally has some of its boards of directors that had affiliations with the ruling party especially those GLCs that previously under government control and later on involved in privatization. Johnson and Mitton (2003) noted that as of October 1999, 15.8% or 67 out of 424 firms listed on the Main Board of Bursa Malaysia Securities are politically connected to the ruling party. Empirical evidence on the association between politicians as director and its impact to firm value is inconclusive. Study by Xu, Zhu and Lin (2005) on state owned enterprises in China revealed that politicians have incentives to control the firms to achieve economically inefficient objectives for political purposes. In a related study, Shleifer and Vishny (1994) exposed that excess employment and wages are frequent in public enterprise that control by politicians. This unhealthy phenomenon could lead to wrong managerial investment decisions and result in misallocation of companys resources that eventually reduce t he firm value. Boubakri, Cosset and Saffar (2008) investigate the association between political connections of newly privatized firms and the impact to performance. The study involved 245 privatized firms in 27 developing and 14 industrialized countries and the earth of political connections is based on whether the particular firms have a politician or an ex-politician on their boards. They find that the politically-connected firms exhibit a poor performance compared to their non-connected counterparts. The similar result also found in Fan et. al (2007). Meanwhile, Fisman (2001) in his study in Indonesia and Faccio (2006) in analysis of 47 countries find a significant relationship between these two variables. In the context of Malaysia where business and politics are inter-related (Gomez and Jomo, 1997) indicated that, participation of politicians in GLCs might have effects on firm value as they act as a link between the governments and companys management. Therefore, it is hypothe sized that,H4 There is a significant relationship between politician as director and firm performance4.5 Government officials as board member in GLCs and firm performanceGLCs are created partly to implement government policy objectives especially those established as a result of privatization exercises in the early eighties. Hence, most of their board of directors are civil servants either still in-service or formal government officials that act as eyes and ear of government as well as communication bridge between the management and the government. Agrawal and Knoeber (2001) in their study found that the politically experience directors that comprises former government officials benefits the company they served and noted that they are more prevalent in firms compare to others outside directors. In a related study in Singapore that involved 25 GLCs and 204 non-GLCs for the period from 1990 to 2000, Ang and Ding (2006) found that GLCs exhibit higher valuations than those of the non-GL Cs in the area of profitability, efficiency and firms financial performance. Like Malaysian GLCs, Singapore GLCs also comprises government officials in their board. At such, it is hypothesized that,H5 There is a significant relationship between in service government official as director and firm performanceH6 There is a significant relationship between former government official as director and firm performance5.0 Research design and methodology5.1 Data and sample designThe first model in this research is designed to examine the impact of ownership structure on corporate performance of all GLCs listed on the main board of Bursa Malaysia Securities for the period of five years (2004 until 2008). To ensure that the sample clearly represent the population intended for the research and to harmonious the selected sample to the GLCs definition, the sample selection is based on the following criteriaAt any time, one specific GLICs either at federal or states government level must be the s ingle largest shareholder with at least 20% share ownership in one particular company on Main Board of KLSE andThe financial and unit trust companies are excluded as they are governed by different set of rules and acts that could affect the end findings of this study. In addition, all required financial data for the study period are to be available in databases (Datastream or Thomson Research) and information on ownership and corporate governance structure from companies respective audited annual report.The study constructs an unbalanced panel data of all GLCs during the study period. This approach has the proceeds of attrition biases in correlation (Hu and Izumida, 2008). The observations period of 2004 to 2008 is chosen mainly because the period was the phase of economic stability in Malaysia when the countrys economy and capitals market activities fully recovered after the Asian Financial Crisis. The performance chart in Figure 2 below reveals that prior to AFC, the Kuala Lumpur Composite Index (KLCI) in average has been trading in an upward trend. However, the AFC push down the KLCI to below 600 during the peak of the crisis. The post-crisis period has seen steady increase in the value of the KLCI even though until 2006 Bursa Malaysia Securities still has some 200 companies trading at more than 50 percent discount to their book values (James, 2006). Another reason for the chosen period is to evaluate the impact of GLCs Transformation Program that launch in May 2004 by Malaysian government to improve performance of GLCs.5.2 Methodology5.2.1 The proposed modelThe following base model will be used to test the hypotheses that have been defined in the previous sectionPERFORM = + 1FG_GLC + 2SG_GLC + 3GOLD + 4GOV_OWN + 5POL + 6GO_BOD + 7EX-GO_BOD + 8LOG_SIZE + 9LEV + 10BOD_SIZE + 11BOD_MEET + 12BOD_IND + iWherePERFORM = the dependent variables proxy by ROA, ROE and Tobins QIndependent variablesFG_GLC = GLCs under federal government(equal to 1 if a firm is under federal government, and 0 otherwise)SG_GLC = GLCs under state government(equal to 1 if a firm is under states government, and 0 otherwise)GOLD = GLCs which government owned one golden share(equal to 1 if a firm has governments golden share, and 0 otherwise)GOV_OWN = captures the percentage of government ownership in a GLCPOL = captures the percentage of politician on the boardGO_BOD = captures the percentage of government official in-service on the boardEX-GO_BOD = captures the percentage of ex-government official on the boardControl variablesLOG_SIZE = natural log of total assets as proxy of firm sizeLEV = firm leverage (total liabilities to total assets)BOD_SIZE = number of board of directors during the yearBOD_MEET = number of board of directors meetings during the yearBOD_IND = captures the percentage of independent directors on the boardi = error term5.2.2 Operationalization of variable selection5.2.2.1 The dependent variableThe dependent variable in this study is firm perform ance that comprises accounting and market based performance namely return on assets (ROA)8and Tobins Q. They are to be employed in this study to measure the impact of ownership structure on corporate performance. The accounting-based performance is the most common types of performance measurement in assessing business performance. In this approach, annual report, which comprises income statements, balance sheets and statements of changes in financial position are the source of information to analyze companys financial performance for one particular financial year. This approach is very important for companys stakeholders such as potential investors since the indicator can help them in making investment decisions. It also vital in helping the companys shareholders to assess how well the company performed in market place in order to make decisions on management and employees rewards, setting suitable plans to sustain the good momentum or even take drastic approaches for company to rem ain in business. The accounting-based performance also helps manager to effectively plan and control in order to achieve the objectives of the company. For example, according to Thompson Yeung (2001), return on equity as one of the accounting-based measurements can accommodate the effect of different accounting procedures across industries and can minimize the multi-linearity between companys specific characteristics such as size, age and profitability.Both ROA and ROE are the most common measurement used in analyzing financial performance of companies and have been used widely in previous studies (Vafeas,1999 Abdullah,2004 Bhagat Black, 2002 Rahman Haniffa 2006 Ang Ding, 2006 Bhagat Bolton 2008 and Chu, 2009).Since accounting-based performance measures the past and current performance of the firm, m