Political Connection, Corporate Governance, and Firm Value: Indonesian Evidence

Abstract

The article aims to examine the effect of political connections and corporate governance on firm value. Political connections are measured by (1) government share ownership, (2) politically connected president commissioners, and (3) politically connected independent commissioners. Meanwhile, Tobin's Q represents firm value. Seventeen government-owned firms and 17 private firms listed on the Indonesia Stock Exchange in 2013 to 2017 were used as samples, with a total of 170 firms over five years of observation. Results of Moderated regression analysis indicate that government ownership positively affects firm value in all three models. It indicates that companies whose shares are directly owned by the central government (state-owned companies) are likely to increase company value. Politically connected president commissioners and politically connected independent commissioners are likely to enhance corporate value. Corporate governance practices stand-alone do not influence firm value; however, when the variable interacts with politically related independent commissioners, corporate governance also increases firm value significant at 5 per cent level. Meanwhile, the interaction between corporate governance and the politically connected independent commissioner positively affect corporate value. The result indicates that corporate governance is a pure moderating variable that strengthens the positive association between politically related independent commissioners and firm value. This study provides evidence regarding politically connected independent commissioners' role in enhancing firm value in a country where corruption is remaining high, and the law enforcement of property right is weak.

Do Political Connections Affect Tax Avoidance in Indonesia? A Systematic Review and Meta-Analysis

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