Corporate governance and foreign equity ownership in Malaysian companies

In the aftermath of the 1997/1998 Asian financial crisis, there are signs that in Malaysia, corporate governance practices are gradually converging towards the Anglo-American model. Drawing on three key theoretical lenses, namely agency theory, institutional theory and resource dependence theory, this study investigates an unexplored phenomenon in corporate governance reformation, at least in the context of Malaysia. The study examines the relationship between corporate governance elements and the level of foreign equity ownership (FEO) in Malaysian public listed companies (PLCs). More specifically, the aim of this study is to answer the following research question - Does corporate governance influence the level of FEO in Malaysian companies? In the context of this study, corporate governance is taken to be the aggregate of board of directors characteristics, directors attributes and ownership structure. On the other side of the equation is FEO, which is taken to be the proportion of equity owned by foreigners. The majority of foreign investors who are making investments in Malaysia originate from Western countries, and are accustomed to the Anglo-American corporate governance system. Thus, this study examines the influence of governance mechanisms in attracting foreign investors in a unique governance context following a major economic event i.e. the Asian financial crisis of 1997/1998. Accompanied by institutional theory and resource dependence theory, agency theory is used as the key lens to explain the hypothesised relationships. The study's hypotheses are tested using the panel data derived from 1,836 observations over a 12 year period, from 2000 through 2011. By considering the existence of heteroscedasticity and the serial correlation problems, the generalised least square (GLS) method was employed to estimate the model. To enrich the findings, logistic regression analysis was further applied and the potential endogeneity issue was resolved with a GMM test. The findings indicate that the level of FEO in Malaysian PLCs is significantly related to foreign directorships, the Western educational background of directors, professional directors, and multiple-directorships. However, the results defy the significant relationships of board size and outside directors, as generally proposed in the extant literature. In addition, the role of ownership structure is important in foreign investors behaviour, since it is found that foreign investors avoid investing in family-controlled companies and in companies with high institutional ownership. Therefore, from the overall results of this study, it can be concluded that there is evidence that corporate governance mechanisms do influence foreign investors decision making, at least in Malaysian PLCs. The implications of this study are discussed in terms of the relevant literature, theory, methodology and practice. In brief, this study has great potential impact in many respects including its relevance for policymakers in setting up new policies, designing new rules and strengthening existing regulations, both at country and firm levels.