The effect of political connections on firms’ performance: The moderating role of leverage
This study seeks to examine the impact of political connections on firms’ performance and the moderating role of leverage on this causal relationship. As an emerging country, Indonesia offers an interesting research setting for this research. Our sample is 471 Indonesian publicly listed firms in 2014–2017, yielding 1,884 firm-year observations. This study uses two indicators as the proxies for firms’ performance: accounting (ROA) and market performance (Tobins’Q). We operationalize political connections with the number of politically connected officials in a firm. Leveraged is measured by dividing total liabilities by total assets at the end of the year. Based on the panel data regression test, our results demonstrate that political connections decrease firms’ market and accounting performance. Further, the results empirically show that leverage strengthens the effect of political connections on firms’ performance. This study contributes to the literature by adding empirical evidence on applying the agency theory to investigate the impact of political connections on firm performance in an emerging country like Indonesia. Furthermore, Indonesia’s multi-party political system offers a research context distinct from other countries.
Al-Matari, E. M., Al-Swidi, A. K., & Fadzil, F. H. B. (2014). The measurements of firm performance’s dimensions. Asian Journal of Finance & Accounting, 6(1), 24–49. https://doi.org/10.5296/ajfa.v6i1.4761
Ang, J. S., Ding, D. K., & Thong, T. Y. (2011). Political connection and firm value. Massey U. College of Business Research Paper No. 31, May. https://doi.org/10.2139/ssrn.1934346
Belghitar, Y., Clark, E., & Saeed, A. (2019). Political connections and corporate financial decision making. Review of Quantitative Finance and Accounting, 53(4), 1099–1133. https://doi.org/10.1007/s11156-018-0776-8
Bliss, M. A., & Gul, F. A. (2012). Political connection and cost of debt: Some Malaysian evidence. Journal of Banking & Finance, 36(5), 1520–1527. https://doi.org/10.1016/j.jbankfin.2011.12.011
Chen, C.-M., Ariff, M., Hassan, T., & Mohamad, S. (2013). Does a firm’s political connection to government have economic value? Journal of the Asia Pacific Economy, 18(3), 477–501. https://doi.org/10.1080/13547860.2012.742674
Cheung, S. Y.-L., Jing, L., Rau, P. R., & Stouraitis, A. (2005). Guanxi, political connections, and expropriation: The dark side of state ownership in Chinese listed companies. SSRN Electronic Journal. https://doi.org/10.2139/ssrn.683726
Deng, X., Tian, Z., Li, J., & Abrar, M. (2012). The diversification effects of a firm’s political connection and its performance implications. Chinese Management Studies, 6(3), 462–487. https://doi.org/10.1108/17506141211259140
Domadenik, P., Prašnikar, J., & Svejnar, J. (2016). Political connectedness, corporate governance, and firm performance. Journal of Business Ethics, 139(2), 411–428. https://doi.org/10.1007/s10551-015-2675-4
Faccio, M. (2006). Politically connected firms. American Economic Review, 96(1), 369–386. https://doi.org/10.1257/000282806776157704
Faccio, M., Masulis, R. W., & Mcconnell, J. J. (2006). Political connections and corporate bailouts. The Journal of Finance, 61(6), 2597–2635. https://doi.org/10.1111/j.1540-6261.2006.01000.x
Fisman, R. (2001). Estimating the value of political connections. The American Economic Review, 91(4), 1095–1102.
Fu, J., Shimamoto, D., & Todo, Y. (2017). Can firms with political connections borrow more than those without? Evidence from firm-level data for Indonesia. Journal of Asian Economics, 52, 45–55. https://doi.org/10.1016/j.asieco.2017.08.003
Fukuoka, Y. (2013). Indonesia’s ‘democratic transition’ revisited: A clientelist model of political transition. Democratization, 20(6), 991–1013. https://doi.org/10.1080/13510347.2012.669894
Gujarati, D. N., & Porter, D. C. (2015). Dasar-dasar ekonometrika (5th ed.). Jakarta: Salemba Empat.
Habib, A., & Muhammadi, A. H. (2018). Political connections and audit report lag: Indonesian evidence. International Journal of Accounting & Information Management. https://doi.org/https://doi.org/10.1108/IJAIM-08-2016-0086
Habib, A., Muhammadi, A. H., & Jiang, H. (2017). Political connections and related party transactions: Evidence from Indonesia. The International Journal of Accounting, 52(1), 45–63. https://doi.org/10.1016/j.intacc.2017.01.004
Hair, J. F., Black, W. C., Babin, B. J., & Anderson, R. E. (2014). Multivariate data analysis (7th ed.). Pearson Education Limited.
Hillman, A. J. (2005). Politicians on the board of directors: Do connections affect the bottom line? Journal of Management, 31(3), 464–481. https://doi.org/10.1177/0149206304272187
Johnson, S., & Mitton, T. (2003). Cronyism and capital controls: Evidence from Malaysia. Journal of Financial Economics, 67(2), 351–382. https://doi.org/10.1016/S0304-405X(02)00255-6
Keefe, M. v. (2019). A theory of political connections and financial outcomes. International Review of Economics & Finance, 61(April 2018), 108–127. https://doi.org/10.1016/j.iref.2019.01.009
Leuz, C., & Oberholzergee, F. (2006). Political relationships, global financing, and corporate transparency: Evidence from Indonesia. Journal of Financial Economics, 81(2), 411–439. https://doi.org/10.1016/j.jfineco.2005.06.006
Ling, L., Zhou, X., Liang, Q., Song, P., & Zeng, H. (2016). Political connections, overinvestments and firm performance: Evidence from Chinese listed real estate firms. Finance Research Letters, 18, 328–333. https://doi.org/10.1016/j.frl.2016.05.009
Pérez, S. G., Sánchez, C. B., & Martín, D. J. S. (2015). Politically connected firms in Spain. BRQ Business Research Quarterly, 18(4), 230–245. https://doi.org/10.1016/j.brq.2014.10.002
Sun, P., Hu, H. W., & Hillman, A. J. (2016). The dark side of board political capital: Enabling blockholder rent appropriation. Academy of Management Journal, 59(5), 1801–1822. https://doi.org/10.5465/amj.2014.0425
Supatmi, M., Sutrisno, T., Saraswati, E., & Purnomosidhi, B. (2019). The effect of related party transactions on firm performance: The moderating role of political connection in Indonesian banking. Business: Theory and Practice, 20(20), 81–92. https://doi.org/10.3846/btp.2019.08
Suryo, H. (2014). Konspirasi bisnis (pengusaha) dalam politik praktis. TRANSFORMASI: Jurnal Ilmu-Ilmu Sosial, 26(1), 1–51.
Tao, Q., Sun, Y., Zhu, Y., & Yang, X. (2017). Political connections and government subsidies: Evidence from financially distressed firms in China. Emerging Markets Finance and Trade, 53(8), 1854–1868. https://doi.org/10.1080/1540496X.2017.1332592
Wahab, E. A. A., Haron, H., Lee Lok, C., & Yahya, S. (2011). Does corporate governance matter? Evidence from related party transactions in Malaysia. In International Corporate Governance Advances in Financial Economics (Vol. 14, pp. 131–164). https://doi.org/10.1108/S1569-3732(2011)0000014009
Wang, Y., Yao, C., & Kang, D. (2019). Political connections and firm performance: Evidence from government officials’ site visits. Pacific-Basin Finance Journal, 57(February), 101021. https://doi.org/10.1016/j.pacfin.2018.05.003
Wong, W., & Hooy, C. (2018). Do types of political connection affect firm performance differently? Pacific-Basin Finance Journal, 51(August), 297–317. https://doi.org/10.1016/j.pacfin.2018.08.009
Wu, W., Wu, C., Zhou, C., & Wu, J. (2012). Political connections, tax benefits and firm performance: Evidence from China. Journal of Accounting and Public Policy, 31(3), 277–300. https://doi.org/10.1016/j.jaccpubpol.2011.10.005
This work is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.
Jurnal Ekonomi dan Bisnis is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License