This paper adopts the political connections rather than the firm size explana-
tion to study ETR in Malaysia. This explanation is informed and justified by
the realization that Malaysia is a developing, ‘‘relationship-based’’ capitalism
rather than a developed, ‘‘market-based’’ capitalism. Specifically, we examine
the relation between ETR and political connections based on a group of
Malaysian firms over a 10-year period. We find a statistically significant nega-
tive link between ETR and political connections. Firms with political connec-
tions pay tax at significantly lower effective rates in Malaysia. Our evidence
suggests that political connections are a significant determinant of ETR and
their impact should be accounted for.
More generally, our results are consistent with the well-documented fact
that the Malaysian government supports selected firms for overlapping policy
and personal reasons. The Malaysian results, as a case in point, indicate that
significant differences may exist between firms of developing (i.e., ‘‘relation-
ship-based’’) capitalisms and firms of developed (i.e., ‘‘market-based’’) capi-
talisms in relation to ETR. Finally, our results hold two implications in
relation to public policy. One is that public policy is a byproduct of the
underlying political economy (e.g., a developing capitalism) and should be
understood as such. Another and more general aspect is that public policy
can impinge on accounting issues and thus aid our understanding of account-
ing issues.
A major limitation, which is common to all ETR studies, is that mechanisms
or processes, which are actually responsible for certain firms to pay tax at lower
effective rates than other firms, are not examined. An interesting issue for