Impact of political connections and Shari'ah compliance on firms' profitability-a case study of Malaysia

Connections between politicians and business houses are not uncommon. Literature shows that firms tend to connect with politicians/political parties to get easy access to credit, to have lax regulatory oversight, to have preferential treatment for government contracts, and to have access to insider information. On the other hand, a Shari'ah-compliant firm is considered to perform ethically and justly due to adherence to the rules and regulations prescribed by Shari'ah. In recent years, the research on political connections of Malaysian listed firms has increased. However, the comparison of politically connected listed firms and Shari'ah-compliant listed firms in Malaysia is lacking. Malaysia is a leading country in Islamic finance; hence, this paper analyzes the impact of political connections and Shari'ah compliance on the profitability of listed firms in Malaysia for the period of 2000–2014. The paper used the regression technique for the analysis. The result of the study shows that Shari'ah-compliant firms perform better than politically connected firms. Shari'ah compliance has a positive and significant impact on the profitability of the firm, whereas political connections have a negative and significant impact on the profitability of the firm in the case of Malaysia.