Political connection and cost of debt: Some Malaysian evidence

► Investigate association between Malaysian politically connected firms and the cost of debt. ► We provide evidence PCON firms are perceived to be riskier by lenders. ► Find PCON firms have higher leverage and more likely to report a loss. ► We provide evidence that PCON firms with CEO duality are perceived by lenders to be more risky. ► We provide evidence that PCON firms with more independent audit committees mitigate this risk. This paper investigates the association between Malaysian politically connected (PCON) firms and the cost of debt. We extend previous research that finds Malaysian PCON firms are perceived as being of higher risk by the market, and by audit firms, by providing evidence that lenders also perceive these firms as being of higher risk. We also find that PCON firms have a significantly (1) higher extent of leverage, (2) higher likelihood of reporting a loss, (3) higher likelihood of having negative equity, and (4) higher likelihood of being audited by a big audit firm. We suggest that PCON firms are charged higher interest rates by lenders as a result of efficient contracting given their higher inherent risks. Additionally, we find that CEO duality present in PCON firms is perceived by lenders as being more risky, and that a higher proportion of independent directors on the audit committee mitigate this perceived risk.