International Applied Economics and Management Letters 1(1): 9-12 (2008)

Are Malaysian Government-Linked Companies (GLCs) Creating Value?

Y. W. Lau1 and C. Q. Tong2

1
Faculty of Economics and Management, Universiti Putra Malaysia
2
School of Business and Law, Sunway University College

Abstract: Government-linked companies (GLCs) play an important role in the development of the Malaysian
economy. However, overall public perception of GLCs in Malaysia has been tainted by the poor performance
of key players, namely Malaysia Airline System (MAS) and Proton Holdings Berhad. Results of prior studies
on the extent to which government intervention affects a company’s performance are mixed. This study
empirically assesses the impact of government intervention on firm value in the context of the Malaysian
economy. Results of statistical analysis conducted on 15 GLCs over six years—i.e. 2000 to 2005—reveal a
significant positive relationship between the degree of government ownership and firm value. In other
words, this study has found that contrary to the adverse public perception of GLCs in Malaysia, government
intervention improves firm value. Results of this study provide preliminary evidence on the effectiveness of
the ownership and control structure of Malaysian GLCs in creating firm value. Such findings pave the way
for future research on the extent to which the ownership and control structure of Malaysian GLCs can serve
as a model for developing and third-world countries to emulate.

Keywords: Government-linked companies, firm value, performance, Malaysia, empirical evidence

Introduction the development of two competing schools of

This study examines the extent to which Malaysian
government-linked companies (GLCs) create value.
GLCs, which account for 36 percent of the market
capitalization of the Malaysian stock market, play a
significant role in the development of the country’s
economy (Mokhtar, 2005). Despite the importance
of GLCs in Malaysia, overall public perception
of them has been tainted by the performance
of key players. For instance, the Malaysia Airline
System’s (MAS) losses ballooned to RM648 million
for the half-year ended September 2005 despite
restructuring undertaken to put the airline back
to financial health. The national carmaker Proton
Holdings’ share price in year 2006 fell sharply when
Volkswagen dropped plans to invest in the company.
The carmaker suffered a pretax loss of RM240.5
million in the third quarter of 2006.
Results of prior studies examining the effects of
government intervention on firms’ performance are
mixed (Boycko et al., 1996; Shleifer, 1998; Dewenter
and Malatesta, 2001;Caves and Christensen, 1980;
Kay and Thompson, 1986; Wortzel and Wortzel,
1989; Martin and Parker, 1995; Kole and Mulherin,
1997). Findings of these studies have resulted in
thought; one is in favour while the other is against
government intervention.
This study assesses which of the two schools of
thought prevails in the context of the Malaysian
economy. This study tests the effects of the degree
of government ownership in GLCs on firm value.
Extant literature that examines the effects of
government intervention on firms’ performance
primarily use private firms’ performance as a
benchmark (Caves and Christensen, 1980; Kay and
Thompson, 1986; Wortzel and Wortzel, 1989; Martin
and Parker, 1995; Kole and Mulherin, 1997;Boycko
et al., 1996; Shleifer, 1998; Dewenter and Malatesta,
2001). Results of this study shed new light on this
area of research as this study assesses the effects of
different degree of government ownership on firm
value.
LITERATURE REVIEW
GLCs are controlled by the Malaysian government
via the Federal Government-Linked Investment
Companies (GLICs)2. GLICs are investment arms of
the government that allocate government funds to

1
The corresponding author can be contacted via telephone +(603) 8946 7873, email waily@econ.upm.edu.my and mailing address
Department of Accounting and Finance, Faculty of Economics and Management, Universiti Putra Malaysia, 43400 UPM Serdang, Selangor,
Malaysia.
2
There are seven GLICs in Malaysia: (1) Khazanah Nasional Berhad (KNB), (2) Kumpulan Wang Simpanan Pekerja (KWSP), (3)
Kumpulan Wang Amanah Pencen (KWAP), (4) Lembaga Tabung Angkatan Tentera (LTAT), (5) Lembaga Tabung Haji (LTH),
(6) Menteri Kewangan Diperbadankan (MKD), and (7) Permodalan Nasional Berhad (PNB).
10 Y. W. Lau and C. Q. Tong
the GLCs. In addition to having ownership in GLCs,
the Malaysian government also has an influence
in the appointment of members of the board of
directors and senior management positions. The
government also has a controlling stake in making
major decisions - e.g. contract awards, strategy,
restructuring and financing, acquisition and
divestments, etc.
To-date, there is a paucity of empirical research
on the extent to which Malaysian GLCs create
value. The effects of government intervention on
companies’ performance have been empirically
assessed in prior studies primarily by comparing
performance of companies with versus without
government intervention. Research findings suggest
that there are two competing schools of thoughts.
According to the first school of thought,
companies with government inter vention are
better governed (Caves and Christensen, 1980; Kay
and Thompson, 1986; Wortzel and Wortzel, 1989;
Martin and Parker, 1995; Kole and Mulherin, 1997;
Ramirez and Tan, 2004; Ang and Ding, 2006). More
specifically, these companies are not only under the
watchful eyes of the public, i.e. namely investors
and shareholders, but also the government. As a
consequence, management of these companies is
more conscious of the importance of maximizing
shareholders’ value over self-interests.
In contrast, the second school of thought is
of the opinion that companies in private hands
are more competitive and have more incentive
to innovate and contain costs (Boycko et al.,
1996; Boubakri and Cosset, 1998; Shleifer, 1998;
Dewenter and Malatesta, 2001; Sun and Tong,
2002; Wei and Varela, 2003). This is because their
counterparts with government intervention are
not only concerned about ensuring that the goal of
wealth maximization is met. These companies—with
government intervention—also need to give due
consideration to several social goals that contribute
towards nation building; the importance of wealth
maximization is downplayed due to the division of
attention across several goals.
This study ascertains which school of thought
prevails in the context of the Malaysian economy
by assessing the relationship between the degree
of government ownership in GLCs and firm
value. Extant literature that examines the effects
of government inter vention on companies’
performance primarily uses private companies’
performance as a benchmark, which is inappropriate;
companies without government intervention are in
a position to perform better due to their undivided
attention on wealth maximization. Hence, this study
contributes towards extant literature by examining
performance—i.e. firm value—relative to the
degree of government ownership.
International Applied Economics and Management Letters Vol. 1, 9-12
METHODOLOGY AND RESULTS
15 GLCs listed on the main board of the Malaysian
stock market from year 2000 to 2005 were included
into the sample. Khazanah National, the leading
GLIC in Malaysia, had an effective ownership
interest of at least 20 percent in each of the 15 GLCs.
Data of the 15 GLCs were collected from year 2000
to 2005 to test the relationship between the two
variables of interest: (1) government ownership
and (2) firm value.
Firm value was measured using Tobin’s
Q (Chung and Pruitt, 1994). The proxy for
government ownership was the percentage of the
Malaysian government ownership—via Khazanah
Nasional—in each GLC. Linear regression was used
to assess the effects of government ownership on
firm value, while controlling for common control
variables.
The linear regression results are summarized in
Table 1. The positive relationship between Tobin’s
Q and Govown was highly significant, p<0.001.
Such findings suggest that the higher the degree
of government ownership in a GLC, the higher
the firm value. None of the effects of the control
variables were significant.
CONCLUSION
Contrar y to the adverse public perception of
Malaysian GLCs, results of this study suggest
that the school of thought that is in favour of
government intervention prevails. Being better
governed owing to a higher degree of government
ownership ensures that due priority is given to
value creation. Results of this study also indicate
that although GLCs’ attention is divided between
several goals, the several goals are attained not to
the detriment of the goal of wealth maximization.
Such finding is consistent with the government’s
aim of cultivating “national champions” upon
whom the country’s economic fate depends on in
the years to come. In other words, the Malaysian
government’s priority is economic development. In
order for GLCs to contribute towards the country’s
economic development, GLCs need to place its
role in creating firm value foremost. Thus, having
several goals does not hinder GLCs’ momentum in
creating firm value.
As the government is managing GLCs effectively,
as evidenced in this study, future research can
consider exploring the extent to which the
Malaysian GLCs’ ownership and control structure
can serve as a model for developing and third-world
countries to emulate.
 Are Malaysian Government-Linked Companies (GLCs) Creating Value? ���
11

Table 1: Linear regression results of the relationship between firm value and government ownership

Dependent Variable: Tobin’s Q

Coefficient t-Statistic p-value
(Constant) 0.686 0.241 0.81
Govown 0.439 4.002*** 0.00016
Non-duality -0.068 -0.613 0.542
Foreign ownership -0.133 -1.186 0.24
Size 0.005 0.037 0.97
Leverage -0.104 -0.869 0.388
Profit 0.015 0.133 0.894
Year 2000 -0.142 -1.080 0.284
Year 2001 -0.148 -1.115 0.269
Year 2002 -0.079 -0.611 0.543
Year 2003 -0.043 -0.328 0.744
Year 2004 0.000 - -
Year 2005 -0.018 -0.131 0.897
Adj R² 0.157
F 2.322** 0.018

Key:
*** significant at 1 percent level
** significant at 5 percent level
* significant at 10 percent level
Govown - percentage of government ownership
Non-dual - governance structure, a dummy variable that takes on a value of one when the firm’s CEO is separate from the
chairman, and zero otherwise
Forown - alternative control mechanism, a dummy variable that is assigned a value of one when there is at least 5% foreign
ownership of the firm’s issued share capital, and a zero value otherwise
Size - total assets
Leverage – total liabilities to total assets
Profit - return on equity
Year 2000-2005 - series of 6 years of analysis period, that controls for the possibility of temporal differences from 2000 to 2005.
Tobin’s Q = MV(CS) + BV(PS) + BV(LTD) + BV(CL)- BV(CA)
BV(TA)
MV(CS) - market value of common shares
BV(PS) - book value of preferred shares
BV(LTD) - book value of long term debt
BV(CL) - book value of current liabilities
BV(CA) - book value of current assets
BV(TA) - book value of total assets

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