The Effects of Political Connection and the Role of Corporate Governance Practices in Indonesia

I. INTRODUCTION

1.1 Background

It is a general knowledge that corporations and politicians (including government) often have an interaction because money and power are natural partners. Political connections are believed to be a source of much value for corporations (Fisman, 2001), but otherwise have detrimental impacts on corporate transparency, in particular the quality of the reported accounting information (Chaney, 2009).

Political connections are shown to have significant impact on the overall economy and the economic life of individual firms. It has been found that political connections help firms to secure favorable regulatory conditions (Agrawal and Knoeber, 2001) and access to resources such as bank loans (Faccio, 2006), which ultimately increases the value of firms (Fisman, 2001) or improves their performance (Johnson and Mitton, 2003).

Johnson and Mitton (2003), who analyze political connections in Malaysia, label as connected firms whose officers or major shareholders are affiliated to top government officials. Fisman (2001) and Luez and Oberholzer-Gee (2006) who analyze in Indonesia, define political-connected as Suharto dependency. This study combine the definition in Boubakri et al (2008) and Chaney at al (2009) by define political connection as at least one member of its board of directors (BOD) or its supervisory board is or was a politician, that is, a member of parliament, a minister or any other top appointed-bureaucrat or tightly related to a politician or party. Special in Indonesia, I add ex military top ranked to the the definition above.

The incentive for corporations to establish political connections in transition economies has been recognized among economist for many years and ultimately arises from the state control of key resources. Because of the ultimate control of most of the resources by the government, the political connectedness could help these connected firms to obtain resources from banks and other state institutions...