Political Connections and Related Party Transactions: Evidence from Indonesia

This study aims to examine the effect of related party transactions (RPTs) on banks’ performance and investigates political connections as moderator in their causal relationship. Our sample is 40 Indonesian banks listed on the Indonesian Stock Exchange for the years 2013–2016 with 160 observations as panel data. Based on panel data regression test, our results demonstrate that account receivables-related RPTs have a positive effect on banks’ profitability and its market performance (Tobin’s Q), but there are consequences of high operating costs and the risk of non-performing loans. Banks receive more funds from their related parties (account payables-related RPTs), banks exhibit higher capital capability and lower market performance. Further, the political connection index in banks significantly affect banks’ capability, liquidity, efficiency, and market value through RPTs. This result indicates that political connection strengthens the effects of RPTs on banks’ performance. Although this study has limited information in determining political connections and has not considered macroeconomic conditions, these findings imply that political connection plays an important role in banks’ performance in Indonesia.

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Abnormal Related Party Transactions, Political Connection, and Firm Value: Evidence from Indonesian Firms

International Journal of Business and Society ◽

10.33736/ijbs.3189.2021 ◽

2021 ◽

Vol 22 (1) ◽

pp. 461-478

Author(s):

Supatmi Supatmi ◽

Sutrisno Sutrisno ◽

Erwin Saraswati ◽

Bambang Purnomosidhi

Keyword(s):

Firm Value ◽

Resource Dependence ◽

Stock Exchange ◽

Resource Dependence Theory ◽

Political Connections ◽

Political Connection ◽

Related Party Transactions ◽

Panel Data Regression ◽

Data Regression ◽

Better Than

This study aims to examine the effect of abnormal related party transactions (RPTs) on firm value and to investigate political connections as a moderator of the causal relationship. Our sample is 450 Indonesian firms listed at the Indonesia Stock Exchange during the period of 2014–2017 with a total of 1,724 firm-year observations. Based on the panel data regression test, our results demonstrate that abnormal RPTs, especially account receivables-related RPTs and account payables-related RPTs, decrease firm value. Further, the results empirically show that political connections negatively affect firm value. Political connections strengthen the effects of abnormal non-account receivable RPT assets and abnormal non-account payable RPT liabilities on firm value. Our findings imply that agency theory explains the impacts of political connections of Indonesian firms better than resource dependence theory.

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Political connections and audit report lag: Indonesian evidence

International Journal of Accounting and Information Management ◽

10.1108/ijaim-08-2016-0086 ◽

2018 ◽

Vol 26 (1) ◽

pp. 59-80 ◽

Cited By ~ 3

Author(s):

Ahsan Habib ◽

Abdul Haris Muhammadi

Keyword(s):

Large Body ◽

Least Square ◽

Political Connections ◽

Audit Report ◽

Financial Reports ◽

Content Type ◽

Related Party Transactions ◽

Ordinary Least Square ◽

Ordinary Least Square Regression ◽

The Impact

Purpose This paper aims to investigate the association between political connections and the audit report lag and whether related party transactions moderate the association between the two. Design/methodology/approach An ordinary least square regression is estimated whereby audit report lag is regressed on political connections, related party transactions and the interaction between the two. Data on the number and amounts of RPTs are hand-collected from audited financial reports. A firm-year observation is politically connected if at least one large shareholder (controlling at least 10 per cent of the votes directly or indirectly) or board member or commissioner is a current or former Member of Parliament, a minister or head of local government or closely related to a politician or party. Findings Findings show that the audit report lag is relatively short for politically connected firms but increases when such firms conduct both operating and loan-type related party transactions. This suggests that auditors understand the incentives for, and the implications of, related party transactions and hence exert additional audit efforts in scrutinizing financial statements: activities that will increase the audit report lag. Originality/value Although a large body of empirical research exists on the determinants of audit report lag, none has examined the impact of political connections. This paper further contributes to the auditing literature by documenting auditors’ evaluation of related party transactions in a developing country.

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