The Value of Political Connections when Authoritarian Governments Fall from Power. Evidence from Malaysia

What is the fate of firms connected to authoritarian regimes when the government falls from power? Recent studies show that firms’ political connections tend to trump their private benefit, yet we know little about whether a positive return is warranted when a firms’ patron is ousted. Using an original dataset on Malaysian firms, we employ weighted fixed-effect analysis to explain why and how the opposition’s historic electoral victory in 2018 affected politically-connected firms’ financial performance. The findings suggest that firms connected to the ousted government improve 9.4% percentage points in returns in an additional year after elections. These rents stem primarily from the new government’s replication of cooptation tactics during authoritarianism. In particular, the new government led by Mohamad Mahathir has appointed key actors (e.g., MPs) to the government-linked companies’ board of directors, while it continued investing in firms connected to the ousted ruling coalition. By co-opting businesspeople and politicians, Mahathir can reduce their fears of facing public scrutiny and provide a route to power, which in turn might fortify Mahathir’s weak political support. We also find little evidence about formal policy influence or signaling legitimacy to financers improving firms’ financial performance. Taken together, our results highlight that regime change can generate effects in the value of political connections that pull in opposite directions. However, how helpful or harmful it is for connected firms depends on the ruler’s willingness to prioritize consolidating power via cooptation over economic and political reform that might damage former government-business relations.