Political connections and stock price crash risk: evidence of institutional investors' heterogeneous monitoring

This study examines the monitoring effectiveness of different types of institutional investors on the association between politically connected firms (PCFs) and stock price crash risk. Using a sample of Malaysian firms from 2002-2012, the study finds that PCFs are positively associated with stock price crash risk, consistent with the theory of crony capitalism and political patronage. However, effective monitoring by institutional investors attenuates crash risk in PCFs. Finally, the findings reveal that only monitoring by pressure-resistant institutional investors can alleviate the risk of crashes in PCF's stock prices. This concurs with the theory of business relationship, and suggests that institutional investors should not be seen as a homogeneous group.