The new structure of corporate governance, institutional investors and capital structure: Evidence from Malaysia

Abstract

Using a panel data of 237 main market Malaysian companies during 2002 to 2011, this paper examines the influence of institutional investors on capital structure after implementing new corporate governance mechanism in Malaysia in 2001. The results of System GMM estimator, in contrast with the previous studies in Malaysia, show that there is a negative relationship between institutional ownership and capital structure. This indicates that restructuring corporate governance in Malaysia has been effective and institutional investors have become more active in the market. We also find that institutional investors are not homogenous. The results reveal that there is a significant relationship only for pressure-insensitive institutions, namely those who have very little or no business relations with their investees. In addition, the findings show that in politically connected firms, institutional investors and especially the pressure-insensitive investors lose their monitoring power.