The effect of related party transactions on firm performance: the moderating role of political connection in indonesian banking
Abstract
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.
Keyword : related party transactions, political connection, firm performance, market performance, banks, Indonesia
How to Cite
Supatmi, mr, 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
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Sari RC, Fatimah PLR, Djajadikerta HG (2016) Development of tunneling detection model: A new corporate performance improvement. Jurnal Pengurusan 48: 1-20.
Su ZQ, Fung HG, Yau J (2013) Political connections and corporate overinvestment: Evidence from China. International Journal of Accounting and Information Management 21 (4): 285-296. https://doi.org/10.1108/IJAIM-02-2013-0006
Sun P, Hu HW, Hillman AJ (2016) The dark side of board political capital: Enabling blockholder rent appropriation. Acade-my of Management Journal 59 (5): 1801-1822. https://doi.org/10.5465/amj.2014.0425
Surifah (2013) Family control, board of directors and bank performance in Indonesia. America International Journal of Contemporary Research 3 (6): 115-124.
Tambunan ME, Siregar H, Manurung AH, Priyarsono DS (2017) Related party transactions and firm value in the business groups in the Indonesia stock exchange. Journal of Applied Finance and Banking 7 (3): 1-20. online Scienpress Ltd.
Tao Q, Sun Y, Zhu Y, Yang X (2017) Political connections and government subsidies: Evidence from financially distressed firms in China. Emerging Markets Finance and Trade 53: 1854-1868. https://doi.org/10.1080/1540496X.2017.1332592
Tsai CC, Chang LE, Chang YL (2015) Related party transactions and corporate value. Journal of Economics, Business and Management 3 (10): 924-928. https://doi.org/10.7763/JO-EBM.2015.V3.310
Utama CA, Utama S (2014) Corporate governance, size and dis-closure of related party transactions, and firm value: Indonesia evidence. International Journal of Disclosure and Governance 11 (4): 341-365. https://doi.org/10.1057/jdg.2013.23
Utama S, Utama CA, Yuniasih R (2010) Related party transaction-efficient or abusive: Indonesia evidence. Asia Pacific Journal of Accounting and Finance 1: 77-102.
Villalonga B, Amit R (2006) How do family ownership, ma-nagement, and control affect firm value? Journal of Fi-nancial Economics 80: 385-417. https://doi.org/10.1016/j.jfineco.2004.12.005
Wahab EAA, Haron H, Lok CL, Yahya S (2011) Does corporate governance matter? Evidence from related party transactions in Malaysia. Advances in Financial Economics 14: 131-164. https://doi.org/10.1108/S1569-3732(2011)0000014009
Watts R, Zimmerman JL (1986) Positive accounting theory. New York: Prentice-Hall.
Wong RMK, Kim JB, Lo AWY (2015) Are related-party sales value-adding or value-destroying? Evidence from China. Journal of International Financial Management and Accoun-ting 26 (1): 1-38. https://doi.org/10.1111/jifm.12023
Ang JS, Ding DK, Thong TY (2013) Political connection and firm value. Asian Development Review 30 (2): 131-166. https://doi.org/10.1162/ADEV_a_00018
Annual reports (2019) www.idx.co.id
Bona-Sánchez C, Pérez-Alemán J, Santana-Martín DJ (2014) Po-litically connected firms and earnings informativeness in the controlling versus minority shareholders context: European evidence. Corporate Governance: An International Review 22 (4): 330-346. https://doi.org/10.1111/corg.12064
Cheung YL, Jing L, Lu T, Rau PR, Stouraitis A (2009) Tunneling and propping up: An analysis of related party transactions by Chinese listed companies. Pacific Basin Finance Journal 17: 372-393. https://doi.org/10.1016/j.pacfin.2008.10.001
Claessens S, Djankov S, Lang LHP (2000) The separation of ownership and control in East Asian corporations. Journal of Financial Economics 58: 81-112. https://doi.org/10.1016/S0304-405X(00)00067-2
Downs DH, Ooi JTL, Wong WC, Ong SE (2016) Related party transactions and firm value: evidence from property mar-kets in Hong Kong, Malaysia and Singapore. Journal of Real Estate Finance and Economics 52 (4): 408-427. https://doi org/10.1007/s11146-015-9509-0
Faccio M (2006) Politically connected firms. American Econo-mic Review 96: 369-386. https://doi.org/10.1257/000282806 776157704
Fisman R (2001) Estimating the value of political connections. The American Economic Review 91 (4): 1095-1102. http://www.jstor.org/stable/2677829
Friedman E, Johnson S, Mitton T (2003) Propping and tunneling. Journal of Comparative Economics 31: 732-750 http://www.nber.org/papers/w9949
Gordon EA, Henry E (2005) Related party transaction and earnings management: Working paper. Rutgers University http://www.ssrn.com
Gordon EA, Henry E, Palia D (2004) Related party transactions: Associations with corporate governance and firm value. SSRN http://www.ssrn.com
Habib A, Muhammadi AH, Jiang H (2017) Political connections and related party transactions: Evidence from Indonesia. The International Journal of Accounting 52: 45-63. https://doi.org/10.1016/j.intacc.2017.01.004
Hillman AJ (2005) Politicians on the board of directors: Do con-nections affect the bottom line? Journal of Management 31: 464-481. https://doi.org/10.1177/0149206304272187
Jensen MC, Meckling WH (1976) Theory of the firm: mana-gerial behavior, agency costs and ownership structure. Journal of Financial Economics 3 (4): 305-360. https://doi.org/10.1016/0304-405X(76)90026-X
Jian M, Wong TJ (2003) Earnings management and tunneling through related party transactions: Evidence from Chinese corporate groups www.cnstock.com
Johnson S, Mitton T (2003) Cronyism and capital controls: Evidence from Malaysia. Journal of Financial Economics 67 (2): 351-382. https://doi.org/10.1016/S0304-405X(02)00255-6
Leuz C, Oberholzer-Gee F (2006) Political relationships, global financing and corporate transparency: Evidence from Indo-nesia. Journal of Financial Economics 81: 422-439. https://doi.org/10.1016/j.jfineco.2005.06.006
Lin WY, Liu YA, Keng I (2010) Related party transactions, firm performance and control mechanisms: Evidence from Taiwan. International Research Journal of Finance and Economics 35: 82-98 http://www.eurojournals.com/finance.htm
Ling L, Zhou X, Liang Q, Song P, Zeng H (2016) Political con-nections, overinvestments and firm performance: Evidence from Chinese listed real estate firms. Finance Research Letters 18: 328-333. https://doi.org/10.1016/j.frl.2016.05.009
Liu C, Uchida K, Yang Y (2012) Corporate governance and firm value during the global financial crisis: Evidence from China. International Review of Financial Analysis 21: 70-80. https://doi.org/10.1016/j.irfa.2011.11.002
Magdalena R, Dananjaya Y (2015) Effect of related parties tran-sactions to the value of enterprises listed on Indonesian Stock Exchange. European Journal of Business and Management 7 (6): 47-57 www.iiste.org
Nekhili M, Cherif M (2011) Related parties transactions and firm’s market value: The French case. Review of Accoun-ting and Finance 10 (3): 291-315. https://doi.org/10.1108/ 14757701111155806
Pizzo M (2013) Related party transactions under a contingency perspective. Journal of Management and Governance 17: 309-330. https://doi.org/DOI 10.1007/s10997-011-9178-1 https://doi.org/DOI 10.1007/s10997-011-9178-1
Pozzoli M, Venuti M (2014) Related party transactions and finan-cial performance: is there a correlation? Empirical evidence from Italian Listed Companies. Open Journal of Accounting 03 (01): 28-37. https://doi org/10.4236/ojacct.2014.31004
Ryngaert M, Thomas SE (2007) Related party transactions: Their origins and wealth effects: Working paper http://ssrn.com/abstract=970689
Sari RC, Fatimah PLR, Djajadikerta HG (2016) Development of tunneling detection model: A new corporate performance improvement. Jurnal Pengurusan 48: 1-20.
Su ZQ, Fung HG, Yau J (2013) Political connections and corporate overinvestment: Evidence from China. International Journal of Accounting and Information Management 21 (4): 285-296. https://doi.org/10.1108/IJAIM-02-2013-0006
Sun P, Hu HW, Hillman AJ (2016) The dark side of board political capital: Enabling blockholder rent appropriation. Acade-my of Management Journal 59 (5): 1801-1822. https://doi.org/10.5465/amj.2014.0425
Surifah (2013) Family control, board of directors and bank performance in Indonesia. America International Journal of Contemporary Research 3 (6): 115-124.
Tambunan ME, Siregar H, Manurung AH, Priyarsono DS (2017) Related party transactions and firm value in the business groups in the Indonesia stock exchange. Journal of Applied Finance and Banking 7 (3): 1-20. online Scienpress Ltd.
Tao Q, Sun Y, Zhu Y, Yang X (2017) Political connections and government subsidies: Evidence from financially distressed firms in China. Emerging Markets Finance and Trade 53: 1854-1868. https://doi.org/10.1080/1540496X.2017.1332592
Tsai CC, Chang LE, Chang YL (2015) Related party transactions and corporate value. Journal of Economics, Business and Management 3 (10): 924-928. https://doi.org/10.7763/JO-EBM.2015.V3.310
Utama CA, Utama S (2014) Corporate governance, size and dis-closure of related party transactions, and firm value: Indonesia evidence. International Journal of Disclosure and Governance 11 (4): 341-365. https://doi.org/10.1057/jdg.2013.23
Utama S, Utama CA, Yuniasih R (2010) Related party transaction-efficient or abusive: Indonesia evidence. Asia Pacific Journal of Accounting and Finance 1: 77-102.
Villalonga B, Amit R (2006) How do family ownership, ma-nagement, and control affect firm value? Journal of Fi-nancial Economics 80: 385-417. https://doi.org/10.1016/j.jfineco.2004.12.005
Wahab EAA, Haron H, Lok CL, Yahya S (2011) Does corporate governance matter? Evidence from related party transactions in Malaysia. Advances in Financial Economics 14: 131-164. https://doi.org/10.1108/S1569-3732(2011)0000014009
Watts R, Zimmerman JL (1986) Positive accounting theory. New York: Prentice-Hall.
Wong RMK, Kim JB, Lo AWY (2015) Are related-party sales value-adding or value-destroying? Evidence from China. Journal of International Financial Management and Accoun-ting 26 (1): 1-38. https://doi.org/10.1111/jifm.12023