Political connection, foreign institutional investors and tunneling: evidence from Indonesia
Abstract
The purpose of this study is to examine the moderating effect of foreign institutional investors on the relationship between political connection and tunneling. To achieve this goal, our study has examined all companies listed on the Indonesia Stock Exchange between 2015 and 2019, and obtained 1,571 firm-year observations. By using a quantitative approach and data analysis using moderated regression analysis, the results of this study indicate that foreign institutional investors play a role in weakening political connections to tunneling. This shows that foreign institutional investors have a role in reducing tunneling. These investors influence the behavior and performance of the company, so, even though the company has political ties, foreign institutional investors are less susceptible to political pressure and are more likely to negotiate to enhance the interests of minority shareholders, and protect their reputations. This finding has important implications for regulators to consider when evaluating the Investor Protection Act, in particular the protection of minority shareholder rights in companies with political ties.
Keyword : tunneling, political connection, foreign institutional investors, minority shareholders, reputation
How to Cite
Nuraina, E., Nasih, M., & Agustia, D. (2022). Political connection, foreign institutional investors and tunneling: evidence from Indonesia. Business: Theory and Practice, 23(2), 417–426. https://doi.org/10.3846/btp.2022.16025
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Chen, S., Han, X., & Jebran, K. (2020). Social trust environment and tunneling. Journal of Contemporary Accounting and Economics, 16(3), 100212. https://doi.org/10.1016/j.jcae.2020.100212
Chen, W., Li, S., & Chen, C. X. (2016). How much control causes tunneling? Evidence from China. China Journal of Accounting Research, 10(3), 231–245. https://doi.org/10.1016/j.cjar.2016.10.001
Cho, S., & Lim, K. M. (2018). Tunneling by related-party transactions: Evidence from Korean conglomerates. Asian Economic Journal, 32(2), 147–164. https://doi.org/10.1111/asej.12146
Choi, H. M., Cho, Y. G., & Sul, W. (2014). Ownership-control disparity and foreign investors’ ownership: Evidence from the Korean stock market. Emerging Markets Finance and Trade, 50(April), 178–193. https://doi.org/10.2753/REE1540-496X5001S112
Covrig, V. M., Defond, M. L., & Hung, M. (2007). Home bias, foreign mutual fund holdings, and the voluntary adoption of international accounting standards. Journal of Accounting Research, 45(1), 41–70. https://doi.org/10.1111/j.1475-679X.2007.00226.x
Dang, V. Q. T., So, E. P. K., & Yan, I. K. M. (2018). The value of political connection: Evidence from the 2011 Egyptian revolution. International Review of Economics and Finance, 56, 238–257. https://doi.org/10.1016/j.iref.2017.10.027
Das, P. (2014). The role of corporate governance in foreign investments. Applied Financial Economics, 24(3), 187–201. https://doi.org/10.1080/09603107.2013.870650
Dewan Perwakilan Rakyat. (n.d.). www.dpr.go.id
Faccio, M., Masulis, R. W., & Mcconnell, J. J. (2006). Political connections and corporate bailouts. Journal of Finance, 61(6), 2597–2635. https://doi.org/10.1111/j.1540-6261.2006.01000.x
Fang, V. W., Maffett, M., & Zhang, B. (2015). Foreign institutional ownership and the global convergence of financial reporting practices. Journal of Accounting Research, 53(3), 593–631. https://doi.org/10.1111/1475-679X.12076
Fisman, R. (2001). Estimating the value of political connections. American Economic Review, 91(4), 1095–1102. https://doi.org/10.1257/aer.91.4.1095
Francis, B. B., Hasan, I., & Sun, X. (2009). Political connections and the process of going public: Evidence from China. Journal of International Money and Finance, 28(4), 696–719. https://doi.org/10.1016/j.jimonfin.2009.01.002
Garner, J. L., & Kim, W. Y. (2013). Are foreign investors really beneficial? Evidence from South Korea. Pacific Basin Finance Journal, 25, 62–84. https://doi.org/10.1016/j.pacfin.2013.08.003
Gong, M., Wang, Y., & Yang, X. (2021). Do independent directors restrain controlling shareholders’ tunneling? Evidence from a natural experiment in China. Economic Modelling, 94(January), 548–559. https://doi.org/10.1016/j.econmod.2020.01.023
Guoping, L., & Hong, Z. (2015). Political connections and access to IPO markets in China. China Economic Review, 33, 76–93. https://doi.org/10.1016/j.chieco.2015.01.009
Ha, P. V., & Frömmel, M. (2020). Political connection heterogeneity and firm value in Vietnam. Cogent Business and Management, 7(1). https://doi.org/10.1080/23311975.2020.1738202
Habib, A., Muhammadi, A. H., & Jiang, H. (2017a). Political connections, related party transactions, and auditor choice: Evidence from Indonesia. Journal of Contemporary Accounting and Economics, 13(1), 1–19. https://doi.org/10.1016/j.jcae.2017.01.004
Habib, A., Muhammadi, A. H., & Jiang, H. (2017b). 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
Harymanwan, I. (2018). Why do firms appoint former military personnel as directors? Evidence of loan interest rate in military connected firms in Indonesia. Asian Review of Accounting, 26(1), 2–18. https://doi.org/10.1108/ARA-07-2016-0086
Harymawan, I., Nasih, M., Madyan, M., & Sucahyati, D. (2019). The role of political connections on family firms’ performance: Evidence from Indonesia. International Journal of Financial Studies, 7(4), 55. https://doi.org/10.3390/ijfs7040055
Harymawan, I., & Nowland, J. (2016). Political connections and earnings quality: How do connected firms respond to change in political stability and government effectiveness? International Journal of Accounting & Information Management, 24(4), 339–356. https://doi.org/10.1108/IJAIM-05-2016-0056
Hayes, A. F. (2018). Introduction to mediation, moderation, and conditional process analysis: A regression-based approach (2nd ed.). The Guilford Press.
Holmes, R. M., Hoskisson, R. E., Kim, H., Wan, W. P., & Holcomb, T. R. (2018). International strategy and business groups: A review and future research agenda. Journal of World Business, 53(2), 134–150. https://doi.org/10.1016/j.jwb.2016.11.003
Huang, J. J., Shen, Y., & Sun, Q. (2011). Nonnegotiable shares, controlling shareholders, and dividend payments in China. Journal of Corporate Finance, 17(1), 122–133. https://doi.org/10.1016/j.jcorpfin.2010.09.007
Huang, W., & Zhu, T. (2015). Foreign institutional investors and corporate governance in emerging markets: Evidence of a split-share structure reform in China. Journal of Corporate Finance, 32, 312–326. https://doi.org/10.1016/j.jcorpfin.2014.10.013
Jennings, W. W. (2005). Further evidence on institutional ownership and corporate value. Advances in Financial Economics, 11, 167–207. https://doi.org/10.1016/S1569-3732(04)11008-6
Jiang, G., Lee, C. M. C., & Yue, H. (2010). Tunneling through intercorporate loans: The China experience. Journal of Financial Economics, 98(1), 1–20. https://doi.org/10.1016/j.jfineco.2010.05.002
Jiang, L., & Kim, J. B. (2004). Foreign equity ownership and information asymmetry: Evidence from Japan. Journal of International Financial Management and Accounting, 15(3), 185–211. https://doi.org/10.1111/j.1467-646X.2004.00107.x
Johnson, S., Porta, R. La, Lopez-de-Silanes, F., & Shleifer, A. (2000). Tunneling. The American Economic Review, 90(2), 22–27. https://doi.org/10.1257/aer.90.2.22
Joni, J., Ahmed, K., & Hamilton, J. (2020). Politically connected boards, family and business group affiliations, and cost of capital: Evidence from Indonesia. British Accounting Review, 52(3), 100878. https://doi.org/10.1016/j.bar.2019.100878
Lee, E. J., Kim, S., & Jang, Y. (2022). Foreign investment horizons, corporate governance and payout policy. Journal of Derivatives and Quantitative Studies, 30(3). https://doi.org/10.1108/JDQS-02-2022-0004
Lel, U. (2018). The role of foreign institutional investors in restraining earnings management activities across countries. Journal of International Business Studies, 50, 895–922. https://doi.org/10.1057/s41267-018-0195-z
Li, G. (2010). The pervasiveness and severity of tunneling by controlling shareholders in China. China Economic Review, 21(2), 310–323. https://doi.org/10.1016/j.chieco.2010.02.002
Li, Z. (2017). The impact of qualified foreign institutional investors on controlling shareholder’s tunneling: Evidence of listed companies in China. American Journal of Industrial and Business Management, 7(4), 522–536. https://doi.org/10.4236/ajibm.2017.74038
Lockett, M. (1988). Culture and the problems of Chinese management. Organization Studies, 9(4), 475–496. https://doi.org/10.1177/017084068800900402
Ma, L., Ma, S., & Tian, G. (2013). Political connections, founder-managers, and their impact on tunneling in China’s listed firms. Pacific-Basin Finance Journal, 24, 312–339. https://doi.org/10.1016/j.pacfin.2013.07.001
Miettinen, T., & Poutvaara, P. (2014). A market for connections. European Journal of Political Economy, 33, 37–52. https://doi.org/10.1016/j.ejpoleco.2013.11.003
Morck, R. K., Strengeland, D. A., & Yeung, B. (1988). Inherited wealth, corporate control and economic growth: The Canadian disease? In NBER Working Paper No. w6814. https://doi.org/10.5860/CHOICE.45-5674
Nyeadi, J. D., & Adjasi, C. (2020). Foreign direct investment and firm innovation in selected sub-Saharan African Countries. Cogent Business and Management, 7(1). https://doi.org/10.1080/23311975.2020.1763650
Qian, M., Pan, H., & Yeung, B. (2011). Expropriation of minority shareholders in politically connected firms. In Finance and Corporate Governance Conference 2011 Paper (pp. 1–37). SSRN. https://doi.org/10.2139/ssrn.1719335
Sari, R. C., & Sugiharto. (2014). Tunneling dan corporate governance. UGM Press.
Sekretariat Kabinet Republik Indonesia. (n.d.). www.setkab.go.id
Sekretariat Kabinet Republik Indonesia. (n.d.). Tag: Kemendagri. https://setkab.go.id/tag/kemendagri/
Shen, W., Zhou, Q., & Lau, C. M. (2016). Empirical research on corporate governance in China: A review and new directions for the future. Management and Organization Review, 12(1), 41–73. https://doi.org/10.1017/mor.2015.11
Strouhal, J., Stamfestova, P., Kljucnikov, A., & Vincurova, Z. (2018). Different approaches to the ebit construction and their impact on corporate financial performance based on the return on assets: Some evidence from Czech Top100 companies. Journal of Competitiveness, 10(1), 144–154. https://doi.org/10.7441/joc.2018.01.09
Supatmi, 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, 81–92. https://doi.org/10.3846/btp.2019.08
Tsai, P. H., Liu, Y., & Liu, X. (2021). Collusion, political connection, and tax avoidance in China. Kyklos, 74(3), 417–441. https://doi.org/10.1111/kykl.12265
Wang, L. (2015). Protection or expropriation: Politically connected independent directors in China. Journal of Banking and Finance, 55, 92–106. https://doi.org/10.1016/j.jbankfin.2015.02.015
Yeh, C. M. (2021). The signaling roles of ownership and board structure for foreign institutional investors in the tourism industry. Journal of Hospitality and Tourism Management, 49(April), 65–73. https://doi.org/10.1016/j.jhtm.2021.08.026
Zhao, X. (2019). The effect of political connections: Model analysis and quantitative simulation. Emerging Markets Finance and Trade, 57(5), 1271–1283. https://doi.org/10.1080/1540496X.2019.1612362
Zhu, H., & Chung, C. N. (2014). Portfolios of political ties and business group strategy in emerging economies: Evidence from Taiwan. Administrative Science Quarterly, 59(4), 599–638. https://doi.org/10.1177/0001839214545277
Akey, P. (2015). Valuing changes in political networks: Evidence from campaign contributions to close congressional elections. Review of Financial Studies, 28(11), 3188–3223. https://doi.org/10.1093/rfs/hhv035
Anderson, H., Chi, J., & Liao, J. (2019). Foreign strategic ownership and minority shareholder protection. Emerging Markets Review, 39(March), 34–49. https://doi.org/10.1016/j.ememar.2019.03.005
Bena, J., Ferreira, M. A., Matos, P., & Pires, P. (2017). Are foreign investors locusts? The long-term effects of foreign institutional ownership. Journal of Financial Economics, 126(1), 122–146. https://doi.org/10.1016/j.jfineco.2017.07.005
Berkman, H., Cole, R. A., & Fu, L. J. (2010). Political connections and minority-shareholder protection: Evidence from securities-market regulation in China. Journal of Financial and Quantitative Analysis, 45(6), 1391–1417. https://doi.org/10.1017/S0022109010000608
Chen, C. J. P., Li, Z., Su, X., & Sun, Z. (2011). Rent-seeking incentives, corporate political connections, and the control structure of private firms: Chinese evidence. Journal of Corporate Finance, 17(2), 229–243. https://doi.org/10.1016/j.jcorpfin.2010.09.009
Chen, S., Han, X., & Jebran, K. (2020). Social trust environment and tunneling. Journal of Contemporary Accounting and Economics, 16(3), 100212. https://doi.org/10.1016/j.jcae.2020.100212
Chen, W., Li, S., & Chen, C. X. (2016). How much control causes tunneling? Evidence from China. China Journal of Accounting Research, 10(3), 231–245. https://doi.org/10.1016/j.cjar.2016.10.001
Cho, S., & Lim, K. M. (2018). Tunneling by related-party transactions: Evidence from Korean conglomerates. Asian Economic Journal, 32(2), 147–164. https://doi.org/10.1111/asej.12146
Choi, H. M., Cho, Y. G., & Sul, W. (2014). Ownership-control disparity and foreign investors’ ownership: Evidence from the Korean stock market. Emerging Markets Finance and Trade, 50(April), 178–193. https://doi.org/10.2753/REE1540-496X5001S112
Covrig, V. M., Defond, M. L., & Hung, M. (2007). Home bias, foreign mutual fund holdings, and the voluntary adoption of international accounting standards. Journal of Accounting Research, 45(1), 41–70. https://doi.org/10.1111/j.1475-679X.2007.00226.x
Dang, V. Q. T., So, E. P. K., & Yan, I. K. M. (2018). The value of political connection: Evidence from the 2011 Egyptian revolution. International Review of Economics and Finance, 56, 238–257. https://doi.org/10.1016/j.iref.2017.10.027
Das, P. (2014). The role of corporate governance in foreign investments. Applied Financial Economics, 24(3), 187–201. https://doi.org/10.1080/09603107.2013.870650
Dewan Perwakilan Rakyat. (n.d.). www.dpr.go.id
Faccio, M., Masulis, R. W., & Mcconnell, J. J. (2006). Political connections and corporate bailouts. Journal of Finance, 61(6), 2597–2635. https://doi.org/10.1111/j.1540-6261.2006.01000.x
Fang, V. W., Maffett, M., & Zhang, B. (2015). Foreign institutional ownership and the global convergence of financial reporting practices. Journal of Accounting Research, 53(3), 593–631. https://doi.org/10.1111/1475-679X.12076
Fisman, R. (2001). Estimating the value of political connections. American Economic Review, 91(4), 1095–1102. https://doi.org/10.1257/aer.91.4.1095
Francis, B. B., Hasan, I., & Sun, X. (2009). Political connections and the process of going public: Evidence from China. Journal of International Money and Finance, 28(4), 696–719. https://doi.org/10.1016/j.jimonfin.2009.01.002
Garner, J. L., & Kim, W. Y. (2013). Are foreign investors really beneficial? Evidence from South Korea. Pacific Basin Finance Journal, 25, 62–84. https://doi.org/10.1016/j.pacfin.2013.08.003
Gong, M., Wang, Y., & Yang, X. (2021). Do independent directors restrain controlling shareholders’ tunneling? Evidence from a natural experiment in China. Economic Modelling, 94(January), 548–559. https://doi.org/10.1016/j.econmod.2020.01.023
Guoping, L., & Hong, Z. (2015). Political connections and access to IPO markets in China. China Economic Review, 33, 76–93. https://doi.org/10.1016/j.chieco.2015.01.009
Ha, P. V., & Frömmel, M. (2020). Political connection heterogeneity and firm value in Vietnam. Cogent Business and Management, 7(1). https://doi.org/10.1080/23311975.2020.1738202
Habib, A., Muhammadi, A. H., & Jiang, H. (2017a). Political connections, related party transactions, and auditor choice: Evidence from Indonesia. Journal of Contemporary Accounting and Economics, 13(1), 1–19. https://doi.org/10.1016/j.jcae.2017.01.004
Habib, A., Muhammadi, A. H., & Jiang, H. (2017b). 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
Harymanwan, I. (2018). Why do firms appoint former military personnel as directors? Evidence of loan interest rate in military connected firms in Indonesia. Asian Review of Accounting, 26(1), 2–18. https://doi.org/10.1108/ARA-07-2016-0086
Harymawan, I., Nasih, M., Madyan, M., & Sucahyati, D. (2019). The role of political connections on family firms’ performance: Evidence from Indonesia. International Journal of Financial Studies, 7(4), 55. https://doi.org/10.3390/ijfs7040055
Harymawan, I., & Nowland, J. (2016). Political connections and earnings quality: How do connected firms respond to change in political stability and government effectiveness? International Journal of Accounting & Information Management, 24(4), 339–356. https://doi.org/10.1108/IJAIM-05-2016-0056
Hayes, A. F. (2018). Introduction to mediation, moderation, and conditional process analysis: A regression-based approach (2nd ed.). The Guilford Press.
Holmes, R. M., Hoskisson, R. E., Kim, H., Wan, W. P., & Holcomb, T. R. (2018). International strategy and business groups: A review and future research agenda. Journal of World Business, 53(2), 134–150. https://doi.org/10.1016/j.jwb.2016.11.003
Huang, J. J., Shen, Y., & Sun, Q. (2011). Nonnegotiable shares, controlling shareholders, and dividend payments in China. Journal of Corporate Finance, 17(1), 122–133. https://doi.org/10.1016/j.jcorpfin.2010.09.007
Huang, W., & Zhu, T. (2015). Foreign institutional investors and corporate governance in emerging markets: Evidence of a split-share structure reform in China. Journal of Corporate Finance, 32, 312–326. https://doi.org/10.1016/j.jcorpfin.2014.10.013
Jennings, W. W. (2005). Further evidence on institutional ownership and corporate value. Advances in Financial Economics, 11, 167–207. https://doi.org/10.1016/S1569-3732(04)11008-6
Jiang, G., Lee, C. M. C., & Yue, H. (2010). Tunneling through intercorporate loans: The China experience. Journal of Financial Economics, 98(1), 1–20. https://doi.org/10.1016/j.jfineco.2010.05.002
Jiang, L., & Kim, J. B. (2004). Foreign equity ownership and information asymmetry: Evidence from Japan. Journal of International Financial Management and Accounting, 15(3), 185–211. https://doi.org/10.1111/j.1467-646X.2004.00107.x
Johnson, S., Porta, R. La, Lopez-de-Silanes, F., & Shleifer, A. (2000). Tunneling. The American Economic Review, 90(2), 22–27. https://doi.org/10.1257/aer.90.2.22
Joni, J., Ahmed, K., & Hamilton, J. (2020). Politically connected boards, family and business group affiliations, and cost of capital: Evidence from Indonesia. British Accounting Review, 52(3), 100878. https://doi.org/10.1016/j.bar.2019.100878
Lee, E. J., Kim, S., & Jang, Y. (2022). Foreign investment horizons, corporate governance and payout policy. Journal of Derivatives and Quantitative Studies, 30(3). https://doi.org/10.1108/JDQS-02-2022-0004
Lel, U. (2018). The role of foreign institutional investors in restraining earnings management activities across countries. Journal of International Business Studies, 50, 895–922. https://doi.org/10.1057/s41267-018-0195-z
Li, G. (2010). The pervasiveness and severity of tunneling by controlling shareholders in China. China Economic Review, 21(2), 310–323. https://doi.org/10.1016/j.chieco.2010.02.002
Li, Z. (2017). The impact of qualified foreign institutional investors on controlling shareholder’s tunneling: Evidence of listed companies in China. American Journal of Industrial and Business Management, 7(4), 522–536. https://doi.org/10.4236/ajibm.2017.74038
Lockett, M. (1988). Culture and the problems of Chinese management. Organization Studies, 9(4), 475–496. https://doi.org/10.1177/017084068800900402
Ma, L., Ma, S., & Tian, G. (2013). Political connections, founder-managers, and their impact on tunneling in China’s listed firms. Pacific-Basin Finance Journal, 24, 312–339. https://doi.org/10.1016/j.pacfin.2013.07.001
Miettinen, T., & Poutvaara, P. (2014). A market for connections. European Journal of Political Economy, 33, 37–52. https://doi.org/10.1016/j.ejpoleco.2013.11.003
Morck, R. K., Strengeland, D. A., & Yeung, B. (1988). Inherited wealth, corporate control and economic growth: The Canadian disease? In NBER Working Paper No. w6814. https://doi.org/10.5860/CHOICE.45-5674
Nyeadi, J. D., & Adjasi, C. (2020). Foreign direct investment and firm innovation in selected sub-Saharan African Countries. Cogent Business and Management, 7(1). https://doi.org/10.1080/23311975.2020.1763650
Qian, M., Pan, H., & Yeung, B. (2011). Expropriation of minority shareholders in politically connected firms. In Finance and Corporate Governance Conference 2011 Paper (pp. 1–37). SSRN. https://doi.org/10.2139/ssrn.1719335
Sari, R. C., & Sugiharto. (2014). Tunneling dan corporate governance. UGM Press.
Sekretariat Kabinet Republik Indonesia. (n.d.). www.setkab.go.id
Sekretariat Kabinet Republik Indonesia. (n.d.). Tag: Kemendagri. https://setkab.go.id/tag/kemendagri/
Shen, W., Zhou, Q., & Lau, C. M. (2016). Empirical research on corporate governance in China: A review and new directions for the future. Management and Organization Review, 12(1), 41–73. https://doi.org/10.1017/mor.2015.11
Strouhal, J., Stamfestova, P., Kljucnikov, A., & Vincurova, Z. (2018). Different approaches to the ebit construction and their impact on corporate financial performance based on the return on assets: Some evidence from Czech Top100 companies. Journal of Competitiveness, 10(1), 144–154. https://doi.org/10.7441/joc.2018.01.09
Supatmi, 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, 81–92. https://doi.org/10.3846/btp.2019.08
Tsai, P. H., Liu, Y., & Liu, X. (2021). Collusion, political connection, and tax avoidance in China. Kyklos, 74(3), 417–441. https://doi.org/10.1111/kykl.12265
Wang, L. (2015). Protection or expropriation: Politically connected independent directors in China. Journal of Banking and Finance, 55, 92–106. https://doi.org/10.1016/j.jbankfin.2015.02.015
Yeh, C. M. (2021). The signaling roles of ownership and board structure for foreign institutional investors in the tourism industry. Journal of Hospitality and Tourism Management, 49(April), 65–73. https://doi.org/10.1016/j.jhtm.2021.08.026
Zhao, X. (2019). The effect of political connections: Model analysis and quantitative simulation. Emerging Markets Finance and Trade, 57(5), 1271–1283. https://doi.org/10.1080/1540496X.2019.1612362
Zhu, H., & Chung, C. N. (2014). Portfolios of political ties and business group strategy in emerging economies: Evidence from Taiwan. Administrative Science Quarterly, 59(4), 599–638. https://doi.org/10.1177/0001839214545277