Political connections and firm performance: evidence from Indonesia
We study the performance of Indonesian firms based on political and non-political connections for the period of 2007 to 2018. Using advanced econometrics approach, we provide a comparative empirical analysis of the linkages between performance, firmspecific characteristics, and macroeconomic varia...
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| Main Authors: | , , |
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| Format: | Article |
| Language: | English English |
| Published: |
Universiti Putra Malaysia
2020
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| Subjects: | |
| Online Access: | http://irep.iium.edu.my/87909/1/87909_Political%20Connections%20and%20Firm%20Performance_article.pdf http://irep.iium.edu.my/87909/2/87909_Political%20Connections%20and%20Firm%20Performance_scopus.pdf http://irep.iium.edu.my/87909/ http://www.ijem.upm.edu.my/vol14no1/3)%20Political%20Connections.pdf |
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| Summary: | We study the performance of Indonesian firms based on political and non-political
connections for the period of 2007 to 2018. Using advanced econometrics approach, we
provide a comparative empirical analysis of the linkages between performance, firmspecific characteristics, and macroeconomic variables for politically-connected (PC) and
non-politically-connected (NPC) firms. In addition, we also offer an empirical analysis of
performance determinants across industries categories and Shariah-compliance status. The
results show the performance (measured by ROA and ROE) of PC and NPC are significantly
influenced by firm-specific characteristics (leverage, tangibility, firm size, and liquidity).
While, only one macroeconomic factor (economic growth) has significant effect to ROA,
and two macroeconomic factors (economic growth and inflation) have significant effect to
ROE of PC firms. Focusing on politically-connected firms, we find a variation of
performance determinants (both firm-specific and macroeconomic factors) across different
industries categories. Interesting insight we noted that there is a persistent negative effect of
tangibility on performance indicators in agriculture-, chemicals-, consumer goods-,
infrastructure-, mining-, and miscellaneous industries. In terms of Shariah-compliant status,
tangibility also exerts the negative and significant effect on ROA of both Shariahcompliance and non-Shariah compliance status. Another important insight is that the
Shariah non-compliance status allows the politically-connected firms to use more leverage
as there is no Shariah restrictions imposed to them. This suggests that high leverage
significantly contributes to increase the ROA of Shariah non-compliance firms. Therefore,
political linked status is still an imperative factor in influencing the Indonesian firm’s
performance. This finding lends some support to the argument on the political connection
and the performance of firm and offers several policy implications from a practical point of
view with regard to the subject matter. |
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