International Research Journal of Finance and Economics ISSN 1450-2887 Issue 61 (2011) EuroJournals Publishing, Inc. 2011 http://www.eurojournals.com/finance.

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Government Ownership and Performance of Malaysian Government-Linked Companies

Nurul Afzan Najid Accounting Lecturers, Accounting Research Institute & Faculty of Accountancy Universiti Teknologi MARA, Shah Alam E-mail: nurulafzan@pahang.uitm.edu.my Rashidah Abdul Rahman Accounting Lecturers, Accounting Research Institute & Faculty of Accountancy Universiti Teknologi MARA, Shah Alam E-mail: shidah@salam.uitm.edu.my Tel: 6019-2336622(HP); 03-55444745(O) Abstract GLCs (government-linked companies) have been criticized for being too risk-averse and lacking sufficient entrepreneurial drive. There have also been charges that certain GLC investments have been politically rather than commercially motivated. Hence, the current study aims to contribute to the literature on the effect of government ownership to the performance of GLCs in Malaysia. Indeed GLCs are key drivers of the Malaysian economy and besides that GLCs also have its own unique characteristics of its government ownerships and not many other countries having such structure among their listed companies. Specifically, this study investigates the governance structure of governmentlinked companies (GLCs) in Malaysia under the ownership/control structure of Khazanah Holdings, the government holding entity, which typically owns substantial cash flow rights to manage Malaysian GLCs. Based on a sample of 47 GLCs and 47 non-GLCs companies listed on Bursa Malaysia over a 6-year period of 2001-2006, the current study found that there is a significant difference in various corporate performance measures (financial and market) between these two groups of companies. Most GLCs corporate performance is lower than non GLCs. A possible reason is that the GLCs Transformation Manual has just been introduced in 2005 and it will probably take a few years for the operational enhancement initiatives outlined in the Manual to take effect. However, the results based on multiple regression show that government involvement in GLCs has a positive significant relationship on firm performance among Malaysian GLCs. The investors believe that GLCs are backed by the government which will not let them down in time of trouble. In fact the investors confidence on the governments effort will contribute towards equality and stability of the economy. The result of the study contradicts the argument that the economic problems in most East Asian countries has been caused by government intervention.

Keywords: Government ownership, corporate governance, government-link companies

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1. Introduction
In the age of globalization and open market, Malaysia is now exposed to more intense competition from other nations around the world. In its move towards the creation of an effective capital market which will supplement the financial system required to support Malaysias economic development, one of the actions taken by the Malaysian government is to transform the government-linked companies (GLCs) into high performing organization. Among the objectives of this transformation is to improve the efficiencies of these monopolies by providing better service to customers and to ensure the future growth in the performance of those companies. According to Putrajaya Committee GLC (PCG) high performance, (2007) GLCs are defined as companies that have a primary commercial objective and in which the Malaysian Government has a direct controlling stake through Khazanah, Ministry of Finance (MOF), Kumpulan Wang Amanah Pencen (KWAP), and Bank Negara Malaysia (BNM). The GLCs are also controlled by other federal government linked agencies such as Permodalan Nasional Berhad (PNB), Employees Provident Fund (EPF) and Tabung Haji. Apart from percentage ownership, controlling stake also refers to the governments ability to appoint board members, senior management and make major decisions (e.g. contract awards, strategy, restructuring and financing, acquisitions and divestments etc.) for GLCs either directly or through Government Link Investment Companies (GLICs). Market economists have argued that firms in the hands of the government are inferior in performance to firms in private hands (Boycko, Shleifer and Vishny, 1996; Shleifer, 1998; Dewenter and Malatesta, 2001). This argument arises due to their institutional relationship with the government, the market structure in which they operate, or the management systems applied within them (Shleifer, 1998). They have also been criticized for being too risk-averse and lacking sufficient entrepreneurial drive. There have also been charges that certain GLC investments have been politically rather than commercially motivated. Thus it will result to the inefficient of financial system and give bad interpretation to the shareholders. In the context of Malaysian situation, GLCs Transformation Manual (page 2) reported that most of the GLCs underperformed in terms of operations and financial indicators since 1990. A study done by CIMB (June 2004)1 also found that the Malaysian GLCs are less productive users of capital, more geared and have lagged significantly in terms of total shareholders return. These results shocked the nations since the GLCs constitute a significant part of the Malaysian economic structure. The media has repeatedly reported that most of the GLCs incurred a huge sum of losses and have involved in activities or project that are not related to their core business. This has resulted to the poor performing portfolios of business among several GLCs. As such the GLCs Transformation Program which was initiated in May 2004 was launched on 29 July 2005. The Program includes various strategies aimed at enhancing corporate governance, developing social leaders and clarifying social obligations to steer the GLCs, particularly in upgrading the effectiveness of GLCs Board. The government expects GLCs to increase their investments and spending to make up for the shortfall arising from the governments move to cut its own expenditure and reduce the budget deficit. Hence, this study examines the performance of GLCs as at 31 December 2006, post GLCs Transformation Program. Particularly, the study compares financial and market performance measures of 47 listed GLCs with a control sample of 47 non GLCs as at 31st December 2006. Additionally, until now various studies have been conducted regarding the relationship between ownership structure and performance of public listed companies, but non focusing on the GLCs. Thus, the current study aims to contribute some literatures on the affect of government ownership to the performance of GLCs companies in Malaysia. Indeed, GLCs are key drivers of the Malaysian economy and beside that GLCs also have its own unique characteristics of its government ownerships and not many countries having such corporate structure among their listed corporations. This is important in
1

See; Catalyzing GLC Transformation to Advance Malaysias Development, Section II-Policy Guidelines;GLCs Transformation Manual, page 3

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order to ensure that Malaysian GLCs performance, which makes up the backbone of the country's economy, improves and have a significant contribution to the nations development and create value for other key stakeholders. In Malaysia and as in other countries, a mixture of social and commercial objectives plays a major role in dictating the path in which the economy grows (Norhisham and Abdul Aziz, 2005) Through the provision of 'mission-critical services' such as transportation, energy, telecommunications and financial services, GLCs serve as a pivotal role in the operation of every commercial concern in Malaysia. These same vital services also contributed significantly towards improving the quality of life for ordinary Malaysians. Hence, improving the performance of GLCs would also have a far-reaching effect on the performance of the economic sector as a whole, as well as the well-being of all Malaysians. Thus, this study further evaluates the effect of government ownership in increasing the value of Malaysian GLCs by emphasizing on the area of corporate governance. In particular by recognizing the significance and prominence role played by GLCs in assisting the development of economic growth of the nation, this study should be relevant to investors as well as the public to gain some information about the effect of government ownership on the accountability and transparency of GLCs in enhancing their firm performance. Additionally this study is expected to provide further understanding and enhancing confidence for the public at large on the governments effort which will contribute toward equality and stability of the economy. With the unique characteristic of some of 48 listed GLCs in the country their dominance in the countrys economy and stock market cannot be denied. In terms of revenue and asset base, GLCs account for a substantial component of the Malaysian economy. Government-linked companies (GLCs) dominate several sectors of the economy and account for 34% of the market capitalization of the Bursa Malaysia, formerly the Kuala Lumpur Stock Exchange (Asian Development Outlook 2004 Update, Silver Book 2006). Most interestingly, not many countries having such corporate structure among their listed corporations. The nearest example is Singapore through Temasek Holdings as the government investment arm. Therefore, improving the performance of GLCs is simply one of the most significant steps that the government can take towards achieving the nations vision for competitiveness and prosperity. The next section provides the literature review and hypotheses development, followed by research methods and data description in Section 3. The results are discussed in Section 4, and Section 5 concludes.

2. Literature Review and Hypothesis Development

Anwar and Sam (2006) stated that the agency problem can also be observed within the public sector. For example, it can involve the citizens (principals) and governing elites (agents), or the citizens (principals) and bureaucrats (agents). In the ideal world public office holders have a genuine interest in serving public welfare. But in reality, at least some public office holders may be interested in maximizing their personal interest rather than that of the public, which they supposedly represent. For example, they may expropriate company funds to travel excessively and furnish their offices with unnecessary electronic gadgets. The problem is worsened, as citizens are usually unwilling to monitor public sector managers. This is because most citizens perceive their individual voice to be insignificant in initiating change and are therefore disinclined to seek costly information and internalize part of the government failures. However, Rhoades et. al (2000) noted that the selection of appropriate governance mechanisms between owners and managers will insure an efficient alignment of the principal and agents interest. For example, government ownership can curb some of the agency problem where government who owns shares in the companies has their representative on board to monitor the managements activities. For example the Ministry of Finance, as a large shareholder of GLCs, has a right to appoint the right candidate to be one of the directors in that particular company, determine their remuneration packages and career advancement without the rigidity of the procedures utilized by the civil service (Anwar and Sam, 2006).

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Government ownership can also solve the information asymmetric problem as a result of the imperfect information given to the investors about the value of the firm. Generally, government is able to obtain information from other sources and be more likely to gain easier access to different channels of financing than non-state firms (Eng and Mak, 2003). Ang and Ding (2006) found that Singaporean GLCs have higher valuations than non GLCs due to their ability to earn higher returns on investment including running more efficient and lower expense operations than non GLCs. The results revealed that GLCs outperform non-GLCs not only in market based valuation measures, but also in accounting based measures of internal process efficiency. This finding is consistent with Singh and Siah (1998) that GLCs are able to achieve at least similar levels of profitability and are as efficient as non GLCs. Government goal is primarily associated with the well-being of the nation. Nevertheless, Mak and Li (2001) argued that the government is likely to be less active in monitoring their investment in GLCs. The weaker accountability for financial performance, easier access to financing, lack of exposure to a market for corporate control, and weaker monitoring by shareholders are likely to reduce the incentives for GLCs to adopt strong governance. Xu and Wang (1999) found that firms accounting performance is negatively related to the level of state ownership in the Chinese government. They found that the inefficiency of state ownership arises from the conflict of interests between the central government agency (GA) which is the Bureau of State Property Management, and other shareholders. This is because the officials of the GA have the rights to select the board members but they have no rights of the reward based on the performance of the state company that they monitor as well as less management experience. With regards to the GLCs performance in Malaysia there are much attention and initiatives to make sure that the government linked companies always perform in an effective way and help the government to improve the economic growth and achieve Malaysian Vision 2020. Indeed, the activities and economic contribution of GLCs form a major part of the nations economy. Therefore to investigate the source of superior GLC performance, the first hypothesis is as follows: H1: There is a significant difference between the performance of GLCs with non GLCs H1a: There is a significant difference between the financial performance of GLCs with non GLCs H1b: There is a significant difference between the market performance of GLCs with non GLCs Notwithstanding, most researchers are in agreement that the presence of government ownership gives rise to inefficiencies and, consequently, poor performance (Megginson, Nash and Randenborgh, 1994; and Megginson and Netter, 2001). As mentioned, the agency conflict in the case of state participation in the equity ownership is more complicated because the government is not the ultimate owner of a company but rather the agent of the ultimate owner that is the public. The theoretical literature (Laffont and Tirole, 1991, Hart, Shleifer and Vishny, 1997) suggests that governments are likely to pay special attention to political goals such as low output prices, employment or external effects many of which may be negatively correlated with firm financial performance. In fact, non profit-maximizing behavior is a key rationale for government ownership in welfare economics (Xu and Wang, 1999). Similar findings were found by Paskelian (2006) who argued that the inefficiency results from agency conflicts as the wealth-maximization goal may be compromised by the social and political agenda of the government. In contrast with this prediction, Sun, Tong and Tong (2002) revealed that government ownership and Chinese firm performance are actually positively related, regardless whether government ownership is proxied by state share ownership or by legal person share ownership. Additionally, Sablok (2001) and Ang and Ding (2006) conduct a study to investigate the relationship between firm valuation, government ownership, and various governance factors, between Singaporean GLCs and non GLCs. They found that firm value is positively and significantly related to government ownership. The openness of the Singapore economy to intense foreign competition and its wellfunctioning markets may be the reasons for their GLCs being comparable to the privately run counterparts in efficiency.

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To assess the relationship between government ownership and firm performance in our sample, this study hypothesizes the following: H2: There is a positive significant relationship between government ownership in GLCs and firms value after controlling for common governance measures

3. Research Methods and Data Collection

This study examines GLCs and non GLCs of Malaysian GLCs over a 6 year period from 2001 to 2006. Similar to the Putrajaya Committee Group (PCG), the important significant criteria for determining the GLCs are (1) major ownership and (2) have a significant direct control by the Malaysia government. Major ownership refers to super control (where GLC is the majority shareholder) or simply control (where a GLIC is the largest shareholder) Secondary sources of information are used in this investigation. There are 48 GLCs companies in Malaysia (www.pcg.com.my) and the corresponding number for non GLCs is selected based on comparable size and industry of GLCs companies, resulting in 96 companies for the whole sample. Non GLCs form the control sample for comparative purposes. As one company, TH Plantation Berhad, was listed only in 2006, financial data during the period of study was not available and had to be excluded from the sample. As a result, the final sample consists of 94 companies (47 for GLCs and 47 for non GLCs), as shown in Table 1. Non-financial data are collected from annual reports of the respective companies while financial data used to calculate the measurement for performance variables, and control variables are obtained from DataStream.
Table 1:
NO. 1 2 3 4 5 6 7 8

Composition of the observations sample based on industries

INDUSTRY CONSTRUCTION CONSUMER PRODUCTS FINANCE INDUSTRIAL PRODUCTS INFRASTRUCTURE PLANTATION PROPERTIES TRADING AND SERVICES TOTAL NO. OF OBSERVATIONS NON-GLC TOTAL 18 36 18 36 48 96 24 48 6 12 42 84 24 48 102 204 282 564 PERCENTAGE TOTAL 6.38% 6.38% 17.02% 8.51% 2.13% 14.89% 8.51% 36.17% 100.00%

GLC 18 18 48 24 6 42 24 102 282

As illustrated in Table 1, 36.17% of the companies are from the Trading and Services industry (e.g. Telekom Malaysia Bhd., Petronas Dagangan Bhd, MISC Bhd.). The second large observations are from the Finance industry which made up 17.02% of the total sample (e.g. BIMB Holdings Bhd., Malayan Banking Berhad, and Bumiputra Commerce Bhd.) and 14.89% from Plantation. 3.1. Measurement Similar to Ang and Ding (2006), various financial based firm performance measures such as return on equity (ROA), return on assets (ROE), cash to total assets, sales to total assets, total expenses to assets and total expenses to sales are computed and analyzed. Additionally, with regard to market performance measures, this study adopts Tobins Q, price to earning (PE) and price to book value (PTBV). According to Ang and Ding (2006), Tobins Q is a more stable approach to estimate firm value since the value of a firms assets are not subjected to the same of volatility as would share price when valuation proxies such as price to book value or price to earning are used. Similar to the method used by Chung and Pruitt (1994), Ang and Ding (2006), Ramirez and Tan (2004), Yermack (1996) and Klein, Shapiro and Young (2004), Tobins Q is measured as:

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Q= (MVE + PS) + DEBT TA

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Where MVE is the product of a firm's share price and the number of common stock shares outstanding, PS is the liquidating value of the firm's outstanding preferred stock, DEBT is the value of the firm's short-term liabilities net of its short-term assets, plus the book value of the firms long-term debt, and TA is the book value of the total assets of the firm. The measurement for the above Tobins Q implicitly assumes that the replacement values of a firms plant, equipment and inventories are equal to book value. The main independent variable in this study is government ownership. In line with the study conducted by Chu and Cheah (2004), government ownership is defined as (a) shares held by the Ministry of Finances investment arm, which is Khazanah Holdings Berhad and State Agency and (b) the government has a direct control for that particular company, that is the government has the ability to appoint board members, senior management and make major decisions (e.g. contract awards, strategy, restructuring and financing, acquisitions and divestments etc.). In other words, even though the government has an ownership in any other public listed company but the government does not have a direct intervention in term of policies making, companys strategies, appointment of board of director and influence in their major decision making. Therefore in this study the government ownership is measured based on the percentage of government ownership among Malaysian GLCs only. The percentage will be determined by analyzing the annual reports particularly among top 30 shareholders. The summary of variables used in the study is presented in Table 2.
Table 2: List of empirical variables
Measurement

Variable Dependent Variables Market Performance Measures Tobin's Q Price to earnings Price to book value Financial Performance Measures Return on Assets(ROA) Return on Equity(ROE) Expenses to assets Expenses to sales Sales to assets Cash to assets Independent Variables Government Ownership Control Variables Non duality

Market Capitalization + Total Debt / Total Assets Current market price/Earning per Share Current market price/Book Value per Share Net income / Total Assets Net Income / Total equity Total expenses / Total assets Total Expenses / Total Sales Total Sales / Total assets Cash / Total assets Percentage of government ownership in GLC Dummy Variable (Value of one when the firm's CEO is separate from the Chairman and zero otherwise) Number of independence non executive director/total number of director Percentage of foreign ownership in that particular companies Natural logarithm of firm's total assets Total liabilities divided by total assets Continuous variable which begins from the firm's date of corporation. Dummy Variable (1 = GLC and 0 = non GLC)

Independence of the board Foreign Ownerships Firm Size Leverage Firm Age GLC dummy

To ensure the factors that affect firm performance are not due to other correlated factors, the control variables adopted in this study include non duality and board independence (as the characteristic of board structure), foreign ownership, firm size, leverage, firm age and GLC dummy. Since the agency theory states that managers with concentrated power often disregard shareholder interest for personal financial benefit, therefore this study will consider non duality or the separation of the office of the Chairman and the CEO. Non duality status of the firms obtained from annual reports is

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proxied by a dummy variable where 1 is coded when the CEO does not serve as the chairman (nonduality) and 0 when both roles of the chairman and CEO are held by the same person (duality) similar to that used by previous researchers such as Ang and Ding (2006), Abdul Rahman and Mohamad Ali (2006), Braun and Sharma (2007). The proportion of independent directors on the board is measured by dividing the total number of independent non-executive directors by the total number of board members (Klein, 2002; Xie et al., 2003; Peasnell et al., 2001 and Abdul Rahman and Mohamad Ali, 2006). The Malaysian Code of Corporate Governance and Bursa Malaysia Listing Requirement acknowledge that in order to have an effective board, executive directors must makeup one third of the board members where the majority should be independent. The interviews in the study by Abdul Rahman (2007) stated that the quality of independence is a serious concern for independent non executive directors to carry out their objective in monitoring and controlling management Similar to Ang and Ding (2006), foreign ownership is included as control variable as an alternative monitoring and it is measured as the percentage of foreign ownership in the companies particularly among top 30 shareholders. In addition, size is measured by log total assets and it is used as control variable because company performance may be a function of size and may bias the results. Given the arguments that debt can solve part of agency cost, this study included leverage as a control variable. Following the techniques used by Ang and Ding (2006) and San, Tong and Tong (2002), leverage is measured by dividing total assets with total debt for each relevant year. The financial leverage represented by the debtequity ratio is used because a large body of literature favours debt contracts as a strong mechanism for solving agency problems as they may prevent managers from investing in value destroying projects (see Bolton and Scharfstein, 1990; Harris and Raviv, 1990; Stultz, 1990; Diamond, 1991; among others). Considering the effect of firm age and maturity on business goals and characteristics this study also includes firm age as a control variable. Applying the same method as Anderson and Reebs (2003) and Braun and Sharmas (2007) to measure firm age, this study used continuous variable which begins from the firms date of incorporation which is available in the annual reports until the relevant years to be analyzed. The GLC dummy is needed in order to control for the type of company between GLC firm and non GLC firm. All the relevant data were collected from DataStream and annual reports of respective companies.

4. Findings
4.1. Descriptive Statistics As the data in this study is not normally distributed, median measures are used to reduce the impact of outliers, similar to that adopted by Abdul Rahman and Limmack (2004). Further, in order to compare the matched samples firms between GLC and non GLCs, Mann Whitney U test rather than student ttest is used to test whether there is a significant difference between market and financial performance of GLCs and non GLCs. The result is presented in Table 3. As seen in the table, the difference in the Price to Book Value (PTBV) ratio between GLCs and non GLCs is not significantly different for the whole period. However, the Price to Earnings (PE ratio) is significantly higher for overall years among GLCs than non GLCs at the 1% level. The high significant PE ratio indicates that GLCs is growing rapidly and market places higher value on GLCs relative to their earning per shares. In addition, it can be seen that generally Tobins Q for GLCs is significantly lower than non GLCs at the 5% level for overall years. It is observed that although GLCs maintain a lower value of Tobins Q in the earlier years, the difference in value between GLCs and non GLCs begin to narrow in 2005 and 2006. The probable explanation is that GLCs Transformation Programme gives a significant contribution in increasing the value of firm and currently the government has taken incentives to bolster up GLCs performance. This Programme is also play a part on the ongoing effort by the Government to drive development and growth in the economy.

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Additionally, this study also capture firm financial performance via return on equity (ROE) and return on asset (ROA).Table 3 shows that for overall years ROE and ROA of GLCs significantly underperforms non GLCs. This finding contradicts with Sabhlok (2001) and Ang and Ding (2006) where they found that Singaporean GLCs are able to achieve at least similar levels of profitability as non GLCs. Among the argument for the lower firm performance by the GLCs in this study is that governments throughout the world have long directed benefit to their political supporters and maximize welfares state goals rather than profit maximization. In fact, non profit-maximizing behavior is a key rationale for government ownership in welfare economics ( Xu and Wang, 1999).
Table 3:
Measures Tobin's Q

Median of performance measures of GLCs vs. Non GLCs

Companies GLCs Non GLCs Z value GLCs Non GLCs Z value GLCs Non GLCs Z value GLCs Non GLCs Z value GLCs Non GLCs Z value GLCs Non GLCs Z value GLCs Non GLCs Z value GLCs Non GLCs Z value GLCs Non GLCs Z value GLCs Non GLCs 2001 0.7149 1.0962 -1.9050** 15.1000 13.5000 -1.1100 1.3950
1.6550 -1.1600 6.5700 10.0400 -1.0350 0.0175 0.0412 -0.9803 -0.0345 -0.0383 -0.4240 -0.0664 -0.0677 -0.6850 0.2462 0.3971 -2.4970** 0.0656 0.0200 0.2670 42 45

Price to Earnings (PE) Price to Book Value (PTBV) ROE

2002 0.7757 1.0854 -1.8980** 17.8000 9.9000 -2.9910*** 1.1000

1.1900 -0.0580 6.4850 8.8300 -1.5640 0.0308 0.0551 -2.0347** -0.0337 -0.0428 -0.6140 -0.0811 -0.0919 -0.7700 0.2730 0.3333 -1.3870 0.0737 0.0222 -0.7700 44 47

2003 0.8461 1.0842 -1.4910 17.5000 14.1000 -1.7080* 1.0600

1.0400 -0.6950 7.0300 11.2300 -1.6940* 0.4490 0.0544 -1.0681 -0.0331 -0.0227 -1.0730 -0.0678 -0.0570 -1.3880 0.2700 0.3112 -1.3570 0.0916 0.0206 0.041** 46 47

2004 0.7617 1.0266 -1.4140 12.7000 14.6500 -0.7270 0.9150

1.0400 -0.7610 10.1600 11.5900 -0.8320 0.0565 0.0531 -1.4179 -0.0366 -0.0270 -0.7080 -0.0803 -0.0587 -1.2340 0.3338 0.4120 -1.1450 0.1262 0.0237 0.09* 47 47

2005 0.6270 0.9431 -0.9490 14.1500 13.0000 -1.0970 1.2850

1.2600 -0.6260 9.5900 10.9950 -0.8180 0.0427 0.0424 -1.4859 -0.0342 -0.0510 -0.4770 -0.0782 -0.0824 -0.6880 0.3404 0.4062 -0.8250 0.1426 0.0289 0.058** 47 47

2006 0.7682 0.6098 -0.5600 13.3000 10.6000 -0.7340 1.1200

1.1800 -0.0650 8.6100 10.3150 -1.2960 0.0422 0.0421 -0.8507 -0.3220 -0.0391 -0.2690 -0.0709 -0.0976 -0.4350 0.3402 0.4266 -0.7110 0.1174 0.0316 0.057** 47 47

All years 0.7521 1.0180 -2.9280** 14.5000 12.1000 -2.8270*** 1.0700

1.1900 -0.7070 8.1300 10.5450 -3.1290*** 0.0407 0.0475 -3.2573*** -0.0338 -0.0343 -1.4390 -0.0761 -0.0720 -2.1310** 0.2850 0.3927 -3.1200*** 0.1046 0.0238 -1.285*** 47 47

ROA

Total expense to total assets Total expense to total sales Sales to total assets Cash to Total assets Sample size

This table compares the median of the various performance measures between GLCs and non GLCs .The Z-value is shown for each year of study. *** significant at 1% level ** significant at 5% level * significant at 10% level

Furthermore it is found that asset turnover (sales to total assets) among GLCs is significantly lower than that of non GLCs at the 1% level and this result is consistent with the findings conducted in Singapore by Ang and Ding (2006). Since asset turnover captures how well a company utilizes its assets, the lower values appear to imply that GLCs do not make as good use of their assets as their non GLCs counterparts. In examining the data further, this study finds that the lower ratio is due to the higher assets level among GLCs, which in turn caused by their propensity to hold larger excess cash. GLCs maintain a significant higher cash to assets ratio than non GLCs. Concomitant with its debt structure, ready cash is possibly needed by GLCs to meet greater interest payment and unexpected cash shortfalls.

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Therefore, the first hypothesis (H1) is supported as there is a significant difference between GLCs and non GLCs based on market performance (Tobinss Q and PE) and financial performance (ROE, ROA, expenses to sales, sales to assets and cash to assets). Table 4 presents the results of the descriptive statistics of the variables for each of the sample year and overall year for GLCs and non GLCs. The results show a considerable variation in government ownership within the sample, ranging from a minimum of 10.69% (Mentakab Rubber Corporation) to 91.93% (Petronas Gas Bhd). The mean and median of government ownership for 47 companies for 6 years is 51.92% and 55.23% respectively. Whereas the mean foreign ownership for GLCs is 3.64% which is lower than that of non GLCs, 11.37%. In addition, the results in Table 4 reveal that the GLCs and Non GLCs are parallel with the requirements of Bursa Malaysia and the Malaysia Code of Corporate Governance (revised 2007) which highlight that the composition of the board of directors where a listed issuer must ensure at least 2 directors or 1/3 (33.33%) of the board directors are independent directors. With regards to leverage, it can be seen that GLCs (0.21) have higher debt ratio as compared to non GLCs (0.18). Further analysis shows that in both GLCs and non GLCs, majority of the chairman and Chief Executive Officer positions are not held by the same person, similar to the findings by PwC Survey (2001) and Abdul Rahman and Haniffa (2005).
Table 4: Descriptive Statistics based on the overall sample of 94 observations
Mean Median Maximum Minimum

Standard Deviation 51.9237 55.2300 91.9300 10.6900 26.8535 GOVOWN GLC 14.7922 14.8144 19.0674 9.7026 1.7796 SIZE GLC 13.9716 13.8853 18.5274 9.3144 1.5535 NonGLC 0.2136 0.1500 1.1800 0.0000 0.2334 LEVERAGE GLC 0.1778 0.1500 0.8400 0.0000 0.1733 NonGLC 3.6404 1.9800 25.8000 0.0000 14.3890 FOREIGN GLC 11.3660 4.1750 98.6000 0.0000 18.7550 NonGLC 0.4095 0.4000 0.7800 0.0000 0.1118 BOARD COMPOSITION GLC 0.4099 0.4000 0.8571 0.1400 0.1291 NonGLC 32.0071 31 96 0 20.0463 AGE GLC 30.6111 27 96 1 18.3094 NonGLC Note: Govown is measured by percentage of government ownership. Non duality leadership is where the role of chairman and executive directors is separate. Size is measured by natural logarithm total assets. Leverage is where total debt divided by total assets. Foreign is measured by percentage of foreign ownership. Board composition is defined as the percentage of non executive directors to total number of directors on board. Age is date of incorporation.

4.2. Pearsons Correlation Matrix The Pearsons Correlation matrix in Table 5 shows the correlation coefficient among the variables for the pooled 94 samples from 2001 until 2006. As illustrated, Tobins Q as a proxy for firm performance is significantly correlated with GLCs status for all the sample years under observations. In addition, GLCs status also has a significant correlation with non duality. This is inline with Malaysian Code of Corporate Governance (2007) requirement of fostering governance by delegating to the Chairman of the Board the role of monitoring CEO and not to allow too much concentration power in one person.

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Table 5: Pearsons Correlation Matrix
Tobins Q Tobins Q PE PTBV ROE ROA Expenses to assets Expenses to sales Sales to Assets Leverage Size Non Duality GLC Foreign Ownership Board Age 1 PE -.036 1 PTBV .154(**) -.004 1 ROE .030 -.038 .063 1 ROA .230(**) -.031 .091(*) -.093(*) 1 Expenses to assets .227(**) -.052 .086(*) -.104(*) .997(**) 1 Expenses to sales .224(**) -.031 .084 -.099(*) .988(**) .986(**) 1 Sales to Assets .146(**) -.038 .325(**) .137(**) -.005 -.037 -.032 1 Leverage .169(**) .000 .087(*) -.082 .806(**) .789(**) .849(**) -.044 1 Size .071 -.037 -.019 -.027 -.187(**) -.176(**) -.177(**) -.267(**) -.080 1 Non Duality -.036 .025 -.097(*) -.019 -.260(**) -.258(**) -.233(**) .035 -.115(**) .101(*) 1 GLC .123(**) .060 -.051 -.049 -.059 -.057 -.057 -.065 -.018 .308(**) .209(**) 1 Foreign Ownershi p -.033 -.028 .026 .035 .024 .017 .023 .267(**) .004 -.070 -.028 -.208(**) 1 1 Board -.031 -.011 .049 -.006 -.021 -.024 -.020 .076 .004 .008 -.018 .027 -.006 Age

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.030 .051 .002 -.026 -.018 -.017 -.020 .017 -.027 .037 .024 .064 -.010 .147(**) 1

This table shows the Pearsons correlation coefficient among the variables for the pooled sample form 2001 until 2006.The pooled sample is obtained by testing all firms over the 6 year period of study. N=94 ** Correlation is significant at the 0.01 level * Correlation is significant at the 0.05 level

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5. Regression Analysis
We further conduct a multiple regression analysis to test the second hypothesis (H2) which predicts that there is a positive significant relationship between government ownership in GLCs on firms value after controlling the various measures of corporate governance. The regression equation is estimated on all 94 companies observations. Table 6 depicts the regression results. The regression model that employs Tobins Q as the dependent variable shows that the model is the best fit. As shown in the Table 6 the Tobins Q regressions model has F statistics of 12.62 and adjusted R squared of 0.1474. The small value of F statistics and adjusted R squared indicates that there are other factors strongly explain the variation in the level of firm performance. However when PE and PTBV is used in the model, the F statistics show that the models are not best fit to test the regression model. Apparently the regression model depicts that only Tobins Q is significant to the government ownership (GOVOWN). Therefore the following discussion focuses mainly on the Tobins Q as a proxy for firm value.
Table 6:
Variable

The regression results of government ownership and firm valuation in GLCs

Model 1 Model 2 Model 3 (Tobin's Q) (PE) (PTBV) GOVOWN 0.00826** -0.12914 -0.00065 NONDUALITY -0.99667*** 1.48713 -0.36601 SIZE -0.37985*** -1.49784 -0.00022 LEVERAGE 0.33805 3.47865 0.03550 FOROWN -0.00247 -0.0665 -0.00846 BOARD 0.41976 -6.66779 0.80622 AGE -0.00306 -0.43547 -0.00859 GLC -0.73138** 26.83214** -0.05843 R2 0.16008 0.02305 0.01570 Adjusted R2 0.14740 0.00652 0.00050 F statistic 12.6265*** 1.39500 1.03295 Note: This table shows the relationship between firm valuation and the percentage of government ownership while controlling for nonduality,firm characteristics such as profitability and risk (firm size and leverage),board composition, firms age and alternative monitoring mechanisms(foreign ownership). Value is measured by Chung and Pruitt (1994) approximation of Tobins Q ,Govown captures the percentage of government ownerships in GLCs; Non-dual is a dummy variable that takes on a value of one when the firms CEO is separated from the Chairman, and zero otherwise; Size is the natural logarithm of the firms total assets that controls for differences in firm size; Leverage is total liabilities to total assets;Forown is capture the percentage of foreign ownership in GLCs and non GLCs; Board composition is defined as the percentage of non executive directors to total number of directors on board; Age is date of incorporated; and GLC is a dummy variable that takes on a value of one if GLCs and zero for non GLCs . Adjusted R2 is the adjusted regression coefficient determination F-statistics is the indicate on how much variation is explain by regression equation *** Significant at the 1% level ** Significant at 5% level * Significant at 10% level

The result in Table 6 supports H2 which indicates that firm value is positively and significantly related to government ownership even after controlling the corporate governance measures. This suggests that Khazanahs stewardships through GLCs have created value for its shareholders. Additionally, this finding confirmed that the shares held by block holders or ownership concentration such as government have a tendency to increase firm value as large shareholders have an incentive to monitor management and solve the free rider problem. Thus the incentive of the controlling shareholders is more likely to be aligned to the interest of other shareholders. The positive results emerge even after controlling for differences in other governance mechanism, non duality, board composition, leverage, firm size, firm age and foreign ownership. This finding is consistent with Claessans (1997) and Ang and Ding (2006) who reports that the level of state ownership of privatized firms is positively related to the firms equity value.

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The results also indicate that there is a negative relationship between non duality and firm value for the period of 2001-2006. This is in sequence with stewardship theory, separating the role of the Chairman and CEO enhances board effectiveness. Steawart (1991) and Abdul Rahman and Haniffa (2005) also agree that role duality helps in decision making as it permits a sharper focus on company objectives and promotes more rapid implementation of operational decisions, allows the CEO with understanding strategic vision to shape the destiny of the firm with minimum board interference (Dahya,Lonie and Power,1996) and may also lead to improved performance resulting from clear and unfettered leadership of the boards (Rechner and Dolton,1991). As shown in Table 6 the result indicates that there is no association between the proportions of board independence and firm values. The result in this study is inline with the results found by Dalton and Daily (1998), Bhagat and Black (2002) and Abdul Rahman and Haniffa (2003) that there is no significant relationship between board independence and firm performance. Similarly, the result in this study indicates that the independence of the outside directors may not be independent enough to monitor organization performance. In addition, Table 6 shows there is a negative relationship between the firm valuation and size at 1% significant level, supporting the assertion made by Sun, Tong and Tong (2002) that large state owned enterprise (SOEs) typically encounters more government bureaucracy, more redundancy and bigger agency problem, thus these will affect firm performance. The negative sign of GLC dummy in Table 6 indicates that basically GLCs firm has a lower Tobins Q than non GLCs. This result aligns with our earlier descriptive analysis where non GLCs tend to exhibit higher valuation than GLCs due to their ability to earn higher returns on their investments.

6. Discussion and Conclusion

This study investigates the governance structure of government-linked companies (GLCs) in Malaysia under the ownership/control structure of Khazanah Holdings, the government holding entity, which typically owns substantial cash flow rights to manage Malaysian GLCs. Particularly this study compares the financial and market performance measures of 47 GLCs with 47 non-GLCs, where each has a different set of governance structure, the key difference being government ownership. The findings indicate that there is a significant difference between market performance (Tobins Q and PE) and financial performance (ROE, ROA, expenses to sales, sales to assets and cash to assets) of GLCs with non GLCs. Although, in general this study found that most of the GLCs corporate performance is lower than non GLCs, the gap is narrow from 2005 onwards. A possible reason for this situation is due to the introduction of GLCs Transformation Manual in 2005 where the government enforced Malaysian GLCs to implement some form of operational enhancement initiatives. With the continuous improvement programme, it is envisaged that the GLCs will further reinforce this mindset of continuous improvement in their day to day operations. In fact, the main objective of this programme is to create competitive and sustainable corporations among Malaysian GLCs to face the increasing pace of globalization, liberalization and international competition. Despite the lower firm performance among the GLCs relative to their counterparts in the private sector, the results from the panel regression indicate that government involvement in GLCs have a positive significant effect on firm value even after controlling for common governance measures such as non duality and board composition, firm specific factors such as leverage, firm size, firm age, foreign ownership (alternative monitoring) and cross-sectional differences between GLCs and non GLCs. The positive significant result of government involvement in GLCs on firm value in this study implies that the Malaysian GLCs have been operating efficiently all along. The openness of the Malaysia economy to intense foreign competition and the well-functioning of its labor, product, and capital markets may be the reasons for Malaysian GLCs being comparable to the privately run counterparts in efficiency. Further, the significant performance measures seem to signal to investors that GLCs backed by the government will not let them fail in time of trouble. Shares held by

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government also tend to enhance publics confidence on the governments effort towards contributing to the equality and stability of the economy. Further, GLCs institutional relationship with the government gives them special advantage in term of access fund, tenders and opportunities. In addition, this study also revealed that GLCs and non GLCs have effective internal mechanisms in term of board leadership and board compositions. The true test of a good corporation is that board of director acts entirely within the bound of the law in the interest of the corporation as a whole. The growing importance of the role of independent directors in Malaysian GLCs will provide an independent view on corporate strategy and help to attain a balance of power and resulted to more accountable decision making. It is believe that these mandatory requirements can enhance transparency, reassure investors confidence and also contribute towards a healthier and stronger capital market among Malaysian companies. Therefore the result in this study is somehow against the argument that the economic problems in most of East Asian countries has been caused by government intervention. The intervention of government in Malaysia is expected to produce better governance and improve the companys business performance. In fact, the government who owns shares in these companies can curb some of the conflict of interest that is expected to happen through their representatives from the Ministry of Finance to be on the board of directors, as such be responsible to control and monitor the management activities. Thus it will somehow help to increase the accountability and efficiency of the Malaysian GLCs through an effective ownership by the government. As the present study only covers 47 GLCs and 47 non GLCs companies for the period of 2001 until 2006, the period of the sample need to be extended in future research to observe the effect of GLC Transformation Programme on firm performance since this programme was launched in July 2005. The longer time frame might be able to capture the effect of the Transformation Programme. A qualitative approach such as interviews to get an in depth understanding of the structure process in GLCs is also suggested to be included in future research analysis.

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