Divestment Of Governments Holding In Pos Malaysia Economics Essay

The possible impact of government ownership on firm performance remains a highly debatable issue, especially in a developing country like Malaysia. Government ownership is typically viewed as potentially affecting firm performance. It does not matter whether the ownership is in the form of state ownership or legal person ownership, government ownership has a positive impact on partially privatized state-owned enterprises. Given the scenario of highly indebted, non-performing state-owned enterprises, we argue that too much government control is indeed bad for enterprises. But too little government ownership may not be good either. This could possibly mean a lack of the government’s political support and business connections, which are valuable and necessary to vitalize performance.


The Malaysian Government has recently announced their plan on The New Economic Model which from the NEAC report has outlined 3 key principles namely – 1. High Income 2. Sustainability and 3. Inclusiveness, for us to drive the country’s economic progress to become a fully developed nation, a competitive economy strategically positioned in the regional and global economy landscape, environmentally sustainable and a quality of life that is all inclusive and encompassing. The raison d’etre of the New Economic Model is for Malaysia to make a quantum leap from the current USD7000 per capita annual income to USD15000 in ten years time. Creating a high income nation is translated as higher wages throughout the economy since growth is derived not only from capital, but from greater productivity through the use of skills and innovation, improved coordination, stronger branding and compliance with international standards and Intellectual Property Rights. In a k-economy, investment in new technology, multi skills, innovation and creativity, and increased competency are the drivers of public and private sector performance. Malaysian Government expects investment and competition for the best talent through paying higher wages. Even wages for the blue collars will be based on them acquiring higher competencies, with their performance more readily benchmarked against international competitors. With more skills, come greater responsibility, and better, higher paying jobs. (Najib Razak, PM on NEM, 2010)

For this very reason, government as the key driver of the country’s economy must play an active role in transforming and reforming the economic model especially the current Malaysia’s Capital Market. The development of Malaysia’s capital markets will be further strengthened in the Second Capital Market Master Plan currently being formulated by the Securities Commission, also on the acceleration of capital market industries such as the fund management, venture capital and private equity sectors as a crucial part of the country’s drive to create the high wage, high skill economy of Malaysia’s future. Related to this issue, the EPF(KWSP) presently dominates local equity and bond markets with up to 50 percent of daily Bursa volume represented by EPF related trades, a situation that is not healthy for the market or for the EPF. Government has announced that the EPF will be allowed to invest more assets overseas, both diversifying its portfolio and creating more room domestically for new participants. EPF currently has about 6 percent of assets invested overseas and this will increase significantly. EPF will also increase its direct investments within the country’s real economy, as an alternative to market investments – taking positions in healthcare, commodities, property and other long-term investments that match EPF’s requirements to protect the real rate of return on its assets. They also outlined a strategy for GLCs to dispose of non-core assets; to catalyze and develop the eco-systems of their core sectors; and, to compete on a level playing field with the private sector. Building upon the third principle, Government Linked Investment Companies (GLICs) should be allowed to divest non-core and/or non-competitive assets. (NEAC on NEM, 2010)

GLCs and Government holding agencies will be encouraged to pursue strategic collaborations with private sources of capital in Malaysia in order to provide prospective investors with exposure to the government order book and build national competencies. Such partnerships will not only drive the regionalization strategy of Malaysian companies which is vital given the size of the domestic market, but also ensure ready pools of capital are in place and available for quick deployment. As such, the opportunity to form partnerships with a wider range of co-investors including retail investors, local and foreign mutual funds remains open. These plan if successfully implemented, the catalytic coalitions could become a unique form of Public Private Partnership. GLCs already have initiatives moving in this direction. Examples include the upcoming Astro (taking private) and Saudi Arabia utilities project partnership between Malakoff and Tenaga Nasional. GLCs have made progress in divesting its non-core assets and Khazanah alone has over the course of the last nine months divested significant stakes in Tenaga Nasional, Malaysia Airports and PLUS for the purpose of increasing the liquidity of these counters. GLCs will continue the divestments of non-core and non competitive assets that operate in areas where new strategic shareholders have the potential to enhance the creation of value, as compared to them being left within the government stable. There are plans outlined to divest the government’s stake in Petronas, Percetakan Nasional Malaysia Berhad, CTRM Aero Composites Sdn Bhd, Nine Bio Sdn Bhd, Innobio Sdn Bhd and others. However for the purpose of the subject of this paper, we will be zooming-in on the divestment of 32% shares of government in Pos Malaysia Berhad. (Khazanah Nasional on GLCs Divestment Plan, 2010)

This paper is divided into 5 sections. Section two is a review of relevant literature. Section 3. details our data and methodology. Section four, presents the results and analysis and the final section five concluded everything.

Problem Statement

Based on the fundamentals in Corporate Finance, the business organization’s aim is to maximize its shareholders’ wealth by maximizing their returns. Pos Malaysia over the years has been generating steady but declining profit margins, maintaining healthy cash flows, continues paying dividends above 10% every year since the last 7 years, initiated share repurchase in the open market in 2007 by distributing RM800 Million of payout to its shareholders and experiencing reduction in its share price despite the basic fundamental in Corporate Finance where share repurchase will result in the increase of the firm’s share price. Despite the commendable performance over the years, Government under the New Economic Model has decided to divest its shares in Pos Malaysia Berhad. Therefore this paper is meant to study the influence of government’s holding on the companies’ performance in Malaysia.

A very important point to note here, as the research methodology is too high level and beyond my level of expertise, I will be using the recent research methodology and findings of more prominent scholars and researchers to avoid any misrepresentation on my concept paper.

Literature Review

Suggestions from both the agency theory and the property rights theory indicated that privatization should impact the corporate performance of companies positively. First of all, the agency theory argues that the government, being the major shareholder of state-owned enterprises (SOEs), is not effective in monitoring the performance of these enterprises. The study by Graf et al. (1990) notices that the management mechanism for state enterprises in developed countries are very hierarchical, ranging from the State, the Federal-owned Assets Management Bureaucracy down to State-owned Assets Management Bureaucracy. Although they are responsible for the appointment of managers working in those enterprises, it has difficulties in monitoring the performance of thousands of SOEs. Such a top-down bureaucracy in fact is ineffective in recruiting capable managers. Managers in those SOEs may have limited expertise in modern finance as well as investment theories and practices. Moreover, with little or no equity incentives, those managers may have no incentive to maximize the value of these firms.

The argument for privatization by agency is that shares distributed to private investors would spur greater incentive for monitoring the performance on these agents, thus reduces agency costs by reducing the agent’s conflict in dealing with diverging state objectives for social welfare maximization versus firm objectives for profit maximization. The property rights theory (Alchian, 1961) on the other hand examines the relation between government and private ownership and their effect on firm performance. They suggest that firms with private ownership should perform better than those with government ownership. According to Aharoni (2000), owners of private firms, as holders of revenue rights and residual control rights, have an incentive to monitor the management behavior closely, thereby affecting a firm’s performance positively. Privatization aims at the decentralization of the state property rights, so that the resource allocation mechanism can be transformed from one focused on central planning to one focused on market orientation. This re-distribution of property rights increases both the control or income rights to private owners and managers, and is therefore likely to improve the corporate performance of SOEs.

Privatization in Malaysia

The privatization in Malaysia started during the era of the 4th Prime Minister, Mahathir Mohamed in 1983. it was very much consistent with his personal ideological and policy preferences as well as the then new wave of conservative market reforms beginning in the West with the election of the Thatcher Government in the United Kingdom in 1979 and the Reagan administration in the United States the following year. Privatization has unevenly proceeded since its emergence in the 1980s. Of the 2,100 known cases of divestiture in developing countries between 1980 and 1991, over half (around 1,300) were in Mexico and Chile alone, leaving a low single digit average for the others (Kikeri, Nellis & Shirley, 1992: 7). Hence, the wholesale approach – advocated by the Privatization Masterplan (PMP) (Malaysia, 1991a) – was an exception rather than the rule. The direction to privatize has since become more significant elsewhere, especially in the so called transitional or former communist economies. For the record, the Malaysian Government identified five different policy objectives for its privatization policy, of which contributing to the New Economic Policy (NEP) has arguably been the most important. The NEP, first announced in 1970, sought to create the conditions for ‘national unity’ by reducing poverty and reducing inter-ethnic disparities, especially between the indigenous, mainly ethnic Malay Bumiputras and the mainly ethnic Chinese non-Bumiputras, usually referred to in Malaysian discourse as ‘restructuring society’. KS Jomo & Tan Wooi Syn (2000)

Data and Methodology

In this paper, they examine the impact of government involvement as the governance mechanism that has an important impact on company performance of Malaysian GLCs and Non-GLC over an 11 year period from 1995 to 2005. They selected a sample of 210 companies which met basic selection criteria. The basic criteria to analyze the sample companies are as follows:

1. Companies are listed with Main Board of Bursa Malaysia

2. Complete set of data are available from 1995 until 2005

3. All the financial based companies were excluded as these companies given a different set of regulation with different operational structure.

Nazrul Hisyam Ab Razak, Rubi Ahmad, Huson Joher Aliahmed (2008)

1 Methodology

Following Multivariate regression, they use panel based data analysis to analyze the impact of government involvement on company performance. Panel based data analysis is more informative as compared to cross-sectional based regression as this may avoid certain assumption promulgated by simple multiple regression.

Performance = Æ’ {Government ownership, Corporate Governance, Risk, Growth and Profitability }

Nazrul Hisyam Ab Razak, Rubi Ahmad, Huson Joher Aliahmed (2008)

2 Parametric Test

The parametric test for the differences in mean value of the characteristics of the sample companies (GLCs) and Non-GLC companies. The characteristics are Tobin-Q, ROE, ROA, size, leverage, profitability, growth opportunity, and government ownership agency cost ratio. This test will provide evidence on the existence of the difference between two groups of the companies.

Nazrul Hisyam Ab Razak, Rubi Ahmad, Huson Joher Aliahmed (2008)

3 Operational Model

Panel based multivariate regression were used to analyze relationships between the various specific characteristics and company performance. It is based on two measures namely market based performance model and accounting based performance model. The operational form of the models is as follows:

Model 1

Tobin’s Q = β0 + β1Gowned + β2Size + β3nDual + β4Debt + β5AC + β6Growth + β7PM+ εi

Model 2

ROA = β0 + β1Gowned + β2Size + β3nDual + β4Debt + β5AC + β6Growth + β7PM+ εi

Nazrul Hisyam Ab Razak, Rubi Ahmad, Huson Joher Aliahmed (2008)

4 The variables and the expected relationships

In their study they use two dependent variables which are Tobin Q and Return on Assets (ROA). Tobin Q is the market based performance measure is defined as the ratio between the market value of company plus total debt and total asset. Meanwhile ROA is a ratio of net income over total asset is used to proxy the corporate based performance measure. Any increase or decrease in these two variables may signal about market perception about the effectiveness of companies’ performance and effective utilization of asset more efficiency to increase performance.

For Gowned, this is a dummy variable is for companies having a government holding more than 20% of the voting shares. Studies by Ang and Ding (2005) and Dyck and Wruck (1998) find that with government owned share more than 20% will contribute better performance that non government owned company. Therefore, a positive result will be expected when it’s related to company performance.

Size is one of control variables. Company size has an ambiguous effect a priori on the company performance. Larger company can be less efficient than smaller ones because of the loss of control by top manager over strategic and operational activities within company (Himmelberg, Hubbard, and Palia 1999, Sarkar and Sarkar 2000). Lang and Stulz (1994) suggests a decrease in company performance as company becomes larger and more diversified. They used the logarithm of total asset (ln(Total Assets) to control for company size and expected negative relationship with company performance.

For variable of Debt, they divided total debt (long and short term debt) by total debt in determine whether leverage have significant different with company performance. Debt financing may play a significant role in reducing management’s discretionary control over free cash flow and their incentive to engage in non-optimal activities (Jensen, 1986, and Stulz, 1990). Debt also force managers to consume fewer perks and become more efficient to avoid bankruptcy, the loss of control as well as loss of reputation (Grossman and Hart, 1982). Debt contracting may result in improved company performance and reduced cost of external capital (John and Senbet, 1998). In short, Debt may help a positive disciplinary effect on company performance. In content of agency costs, we used two variables which are nonDual and AC (which total expenses to sales). A dummy variable on one value is when chairman and CEO is different person when determine on nonDual variable. Rhoades (2001) found that companies with a separation of the two roles consistently have higher accounting return compared to those that have the roles combined. Role duslity is not common in Malaysian corporations (PwC,1998), but MCCG (Malaysian Code of Corporate Governance) recommended companies to separate the two roles to ensure proper checks and balance on the top leadership of the corporation. Therefore, they expect that positive relationship between nonDual and performance. In AC, previous studied by Ang (2000) indicated that government with lower expense to sales ratio will lead to better performance in government linked companies in Singapore. In this situation they expect that a negative relationship between AC and company performance.

In explaining the Growth variable, Morck, Shleifer & Vishnny(1998) argued that a high growth rate indicates greater flexibility in future investments and it will lead to better performance. Companies with their own cash reserve can use when company have a financial distress especially during crisis and with higher cash balance show company have better cashflow and at same time provide better performance. Therefore, they expect Growth to be positively related to company performance.

In profitability, they used Profit Margin is ratio of net income over sales. They want to know how efficient the company managed their sales in getting profit. A positive relationship between Profit Margin and company performance is expected.

Nazrul Hisyam Ab Razak, Rubi Ahmad, Huson Joher Aliahmed (2008)

Research Results

There are various forms of acceptable governance in each country evolve from a country’s history values, and culture, while certain characteristics of superior governance have been documented in the literatures (e.g., Shleifer and Vishny, 1997). They have consider the role of corporate governance and government control in the context of Malaysian companies and its capital market and examine the issue of value relevance of corporate governance and governmental control in assessing company value. They compare the performance (financial, business & others) of GLCs with non-GLCs, and determine whether government ownership and various governance measures contribute to accounting and market based company valuation, using panel and pooled regression analyses. Before the proposed models estimated, the normal distribution of the data, multi-collinearity, auto-correlation and hetero-skedascity problems and some econometrics issues addressed. This section will provide results from the various econometrics tests that helps detecting these problems. From these problems, various remedies to are also suggested.

Table 1: Normality Test Statistics Of 210 Malaysian companies



Std. Dev.





















































































1 Results of Data on normality test

The findings of the normality tests are shown in Table2. Results show that the variable are not are not normally distributed. Skewness, Jarque Bera and Kortosis suggested that there is a problem of normality, therefore likely that the utilization of Ordinary Least Square (OLS) to analyze the data would produce biased and imprecise estimators. Hence for this reason, the Generalized Least Square (GLS) method is more appropriate and can be expected to yield a much better result (Gujarati, 2002).

Table 2: Differences between GLC and Non-GLC companies Characteristics






No of company


Market measurements

Tobin’s Q (TobinQ)

Accounting measurements

Return on Assets (ROA)

Control variables

Size (Growth)

Leverage (Debt)

Other variables

Non-Duality (ndual)

Agency cost (AC)

Cash to Assets (Growth)

Profitability (PM)

*** significant at 0.01 level

** significant at 0.05 level

* significant at 0.1 level




































Table 2 present the mean difference characteristics of GLCs and Non-GLC companies. Findings suggest a significant difference existed between the two groups based on performance, governance ownership, leverage and risk, growth opportunities, agency cost. The hypothesis of there shouldn’t be any difference between the two groups is rejected at the conventional level. Results show that portfolios of control companies (non-GLCs) outperform GLCs for market performances (Tobin’s Q). At the same time, result of test for Tobin’s Q shows negative and significant at the 1% level. As mentioned earlier, government owned large percentage of market capitalization therefore, it will show big impact of decreasing in market price when crisis hit Malaysia until recovery section in 2000 onwards. This some how contradict with the findings by Ang and Ding (2005) and Singh and Siah (1998). They suggested that shown GLCs outperform non-GLCs on both counts of profitability (ROA and ROE). For example, Ang and Ding’s result in Singapore study shows that GLCs are able to achieve at least similar levels of profitability with that of and non-GLCs.

From the context of the leverage difference, the study found that GLCs record lower debt ratio compare to non GLCs with negative correlation, significant at 5% level. Similarly growth opportunities for GLCs tend to be lower than non-GLCs. We also find that GLCs maintain a significantly higher cash to asset ratio than non-GLCs and positively correlated and significant at the 1% level. In measuring agency costs, they examined the expense to sales (Ang et al, 2000) and results show that GLCs in fact have lowers expenses at the 1% level. This finding supported by Pearson’s correlation in Table 3 which show negative correlation and significant for both ratios. In summary, they concluded that GLCs tend to exhibit higher valuation than non-GLCs due to their ability to earn higher returns on their investments, including running more efficient and lower expenses operations non-GLCs. The results support their hypothesis that GLCs outperformed non-GLCs not only in market based valuation measures, but also in accounting based measures of internal process efficiency.

2 Panel and pooled regression analysis

In providing evaluation of the impact of good governance as proxied by government ownership and control, the model includes 7 important variables to address corporate governance issue, size, role of CEO, leverage, growth opportunities, agency cost and profitability issues. Regression (panel based) run over a period from 1995 to 2005 for both findings are presents at the following Table.

Value = β0 + β1Gowned + β2Size + β3nDual + β4Debt + β5AC + β6Growth + β7PM…..(Eq.1)

Table 4: Fixed Panel Regression result for Tobin’s Q and ROA as performance

Model 1: Tobin’s Q with Fixed effect

Variable Coefficient t-Statistic Prob.

C 2.3027 10.0614(***) 0.0000

Gowned 0.1140 1.7750(*) 0.0760

Size -0.1066 -6.5991(***) 0.0000

nDual 0.0131 0.2078 0.8354

Debt 0.7343 11.9148(***) 0.0000

AC 0.1898 4.9237(***) 0.0000

Growth 1.8251 10.5691(***) 0.0000

PM 0.0000 0.1534 0.8781

R-squared 0.2276

Adj Rsquared 0.2219

F-statistic 39.6916

Prob(F-stat) 0.0000

Model 2: ROA with Fixed effect

Variable Coefficient t-Statistic Prob.

C -0.1156 -5.3029(***) 0.0000

Gowned 0.0223 3.6445(***) 0.0003

Size 0.0082 5.3016(***) 0.0000

nDual 0.0139 2.3013(**) 0.0215

Debt -0.0394 -8.3389(***) 0.0000

AC 0.0212 5.7367(***) 0.0000

Growth 0.2140 13.4237(***) 0.0000

PM 0.0007 22.8840(***) 0.0000

R-squared 0.3060

Adj R-squared 0.3008

F-statistic 59.3949

Prob(F-stat) 0.0000


*** Correlation is significant at the 0.01 level

** Correlation is significant at the 0.05 level

* Correlation is significant at the 0.1 level

2.1 Result Based on Market measure

Findings from Model 1 based on Tobin’s Q, a model fitness with the F-value of 39.6916 is significant at any level and adjusted R2 is 22.19%. The joint null hypothesis of none of the variables are significant is rejected. The coefficients of the explanatory variables are consistent with the hypothesized objective in the Malaysian Context. Results support the contention that government ownership does provide an important impact on performance in Malaysia with a (t = 1.7750), significant at 10% level. This is consistency with findings by Ang and Ding (2005 et. al,) and Dyck and Wruck (1998) who documented that government involvement through government agency will lead to better performance of company. The results also indicate a positive and significant (p<0.01) relationship between market performance and leverage factors (t = 11.9148), implying that the market perceive leverage as an effective mechanism to control management and improve performance. For agency costs, result appear to document a significant positive association between agency cost and company performance at 1% level (which t = 4.9237). However, this appears to be inconsistent with Ang and Ding (2000) who record a negative association between agency cost and company performance. While growth opportunities (cash to total assets), appear to have an important impact on company performance significantly at 1% indicate that cash rich companies will have more leverage in improving company’s performance by engaging in growth activities. Cash rich company performance able to meet any due obligation and potential downfall. Surprisingly, both duality and Profit Margin are not found to have any significant impact on market based performance measure Tobin Q.

2.2 Result Based on Accounting Measure

Result from Model 2 which we use ROA as company performance (accounting measurement) shows that a model appropriateness with the F-value of 59.3949 is significant at any level of significant and also adjusted R2 is 30.08%. The joint null hypothesis of the variables are significant is rejected except size and debt. These two variables seem are inconsistent with the hypothesized objective in the Malaysian Context. For example, in this result a positive relationship between size of company and performance (t- 3.6445 and significant at 1% level). It shows that larger assets companies displayed better performance than small company. This result is consistency with finding by Ang and Ding (2005 et al.) and RosHaniffa (2000). Meanwhile in debt ratio, a negative result (t = -8.3389 and significant at 1% level) explain that company with lower debt show better performance and this result reliable with the findings of McConnell and Servaes (1995) and Weir et al (2002). As Model 1, results support the contention that government ownership does provide an important impact on performance in Malaysia with a (t = 3.6445), significant at 1% level. This is consistency with findings by Ang and Ding (2005 et. al,) and Dyck and Wruck (1998) who documented that government involvement through government agency will lead to better performance of company. For agency costs, result appear to document a significant positive association between agency cost and company performance at 1% level (which t = 5.7367). However, this appears to be inconsistent with Ang and Ding (2000) who record a negative association between agency cost and company performance. For non-duality, a result show positive relationship (t = 2.3013) at 5% level of significant shows that with separate person between Chairman and CEO will lead to better performance and align with MCCG recommend. While growth opportunities (cash to total assets) with t = 13.4237, appear to have an important impact on company performance significantly at 1% indicate that cash rich companies will have more leverage in improving company’s performance by engaging in growth activities. While cash rich company performance meet any due obligation and potential downfall. Then, it shows positive relationship of profit margin with accounting performance with t-statistics is 22.8840 at 1% level of significant.

Nazrul Hisyam Ab Razak, Rubi Ahmad, Huson Joher Aliahmed (2008)


In this paper, we have covered on the control/ownership structure of Malaysian company and its performance in general and comparing GLCs and non-GLCs specifically with the companies’ specific characteristics. The sample from Nazrul Hisyam Ab Razak, Rubi Ahmad, Huson Joher Aliahmed (2008) has analyzed 210 companies listed in Main Board in Bursa Malaysia. They then compute the Tobin’s Q as proxy of company value (market performance) and ROA as accounting performance. These two different measurements use to make comparison whether its show same or different result. Based from our study, they found that in marke