This paper examines the impact of cronyism and capital controls on the performance of firms in Malaysia during the Asian financial crisis. The authors find that politically connected firms suffered a significant loss in market value during the initial phase of the crisis (July 1997 to August 1998), with about 9% of the estimated $60 billion loss attributed to the decline in the value of their political connections. The imposition of capital controls in September 1998 led to a rebound in the market value of these firms, with about 32% of the estimated $5 billion gain attributed to the increase in the value of their connections. The evidence suggests that capital controls provided a mechanism for supporting favored firms through cronyism. The study also finds that firms with strong ties to Prime Minister Mahathir performed better than those with ties to Deputy Prime Minister Anwar Ibrahim after the imposition of capital controls. The results are robust to various tests and provide strong support for the hypothesis that capital controls are linked to cronyism.This paper examines the impact of cronyism and capital controls on the performance of firms in Malaysia during the Asian financial crisis. The authors find that politically connected firms suffered a significant loss in market value during the initial phase of the crisis (July 1997 to August 1998), with about 9% of the estimated $60 billion loss attributed to the decline in the value of their political connections. The imposition of capital controls in September 1998 led to a rebound in the market value of these firms, with about 32% of the estimated $5 billion gain attributed to the increase in the value of their connections. The evidence suggests that capital controls provided a mechanism for supporting favored firms through cronyism. The study also finds that firms with strong ties to Prime Minister Mahathir performed better than those with ties to Deputy Prime Minister Anwar Ibrahim after the imposition of capital controls. The results are robust to various tests and provide strong support for the hypothesis that capital controls are linked to cronyism.