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Political Influence and Corporate Transparency in Indonesian Companies Essay

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Updated: Apr 6th, 2022

Sari and Anugerah (773) conducted a research to determine the effect of political influence and corporate transparency on firms’ performance in Indonesia’s listed companies. Sari and Anugerah gave various evidences from the listed companies in Indonesia.

They selected a sample of seventy three large public firms in Indonesia and collected data for corperate transparency from the year 2005 to the year 2007; these data were collected from the annual reports of the firms. Sari and Anugerah used the amount of information disclosed by a company yearly report as the corporate transparency index.

The report is mainly based on the Annual Report Award (ARA) which is a reward meant for companies which are listed and also non-listed ones in Indonesia.

They also used the firms’ performance using two indicators: the Return on Assets (ROA) and the Tobin-Q. Government ownership and the existence of politicians in the Board of Directors (BOD) of companies are the two proxies for the political influence variable in the research.

The aim of Sari and Anugerah in their experiment was to examine the effect of political influence on corporate transparency, political influence on a firm’s performance, the effect of corporate transparency on a firm’s performance and the mediating effect of corporate transparency on the relationship of political and firm performance.

Sari and Anugerah used literature from a wide variety of areas to establish their hypotheses. From their literature reviews, they found out that issues such as management, control, transparency and accountability information are provided by disclosure of the firms.

According to the authors, corporate disclosure provides information to its users so that they can easily determine firms with bad or good governance practices. They have viewed political influence in two different perspectives.

First, they view political influence as a positive thing or an advantage to the company through lower costs of debts and rent while the second, they view political influence as a disadvantage or an inefficiency to the company.

They describe the ways in which political influences arise in companies; it can be through state ownership, affiliation to people in political capacities in the government and finally through golden share allocation to the government.

Through the political research literature done by Sari and Anugerah, companies which are influenced politically do not normally disclose their information or seldom disclose the company’s information. Although these companies have a low disclosure and transparency level, they still easily access bank credits due to the political influence in the company.

The authors eventually formulated hypotheses using the literature materials they studied. The following was one of their hypothesis: “H1: Political influence is negatively related to corporate transparency” (Sari and Anugerah 775).

Some political literature was discovered to have negative consequences for the company. The researchers linked weak corporate governance with political influence in the firm and hence affecting the company’s performance.

Political influences lead to political costs associated with control from politicians. This was evident through the poor performance of state-owned companies that are affiliated to politicians; this is due to excessive control by political persons.

The researchers defined another hypothesis from their research on the disadvantages of political interference, “H2: Political influence is negatively related to firm performance” (Sari and Anugerah 775).

Further literature research yielded results on the corporate transparency and firm performance which were done by Sari and Anugerah. They noticed that the level of disclosure is influenced by corporate governance in companies.

Also, the level of transparency and disclosure affects the firm’s performance; high level of transparency leads to reduced cost of capital, more long term investors, good management , improves credibility of the company and enables easy access to more capital. This led to the conclusion that high level of transparency improves the market image of a company.

Therefore, Sari and Anugerah formulated the hypothesis below through their findings: “H3: Corporate transparency is positively related to firm performance” (Sari and Anugerah 775).

In the first two hypotheses given by the authors of this article, they found that political influence affects corporate transparency and firm performance. Due to their findings, they concluded that politicians influence the management of information that is to be disclosed to the public. Low levels of transparency consequently affect firm performance.

Sari and Anugerah introduced a mediating variable between political influence and firm performance through positioning corporate transparency and disclosure. This mediating variable led to another hypothesis, “H4: the relationship between political influence and firm performance is mediated by corporate transparency” (Sari and Anugerah 775).

Sari and Anugerah collected data from annual reports and related resources that were available. They selected a sample from a hundred largest public companies in Indonesia rated by SWA 2009. Nine firms that were selected from finance and insurance industries were omitted due to their special requirement for disclosure.

Twelve firms were omitted that were listed in the year 2006 and 2007. Sari and Anugerah further omitted six firms due to incomplete data. They eventually came up with a sample of 219 companies.

Proxies for political influence were used by Sari and Anugerah in their study. They used the percentage of government ownership in a company as a proxy of political influence and another as a dummy variable that indicates if a politician is in the BOD.

Their definition of a politician is anyone who is or was in an elected position at the state or federal level. They scrutinized the background information of members of the BOD of each company in every annual report.

Corporate transparency is measured by transparency and disclosure index (TDI) and was adopted from Annual Report Awards of 2008. They also formulated an unweighted index through previous studies; the index is basically a count of items disclosed in the annual reports.

Two indexes were used as performance indicators for the firms: the return on assets (ROA) and Tobin-Q. ROA is measured from net income over total assets at the end of financial year and Tobin-Q is measured by total debts, preferred stock and market value over book value. The control variables are size of the firm which is measured by natural log of the annual total assets and also the age of the firm.

Statistical analysis was done by these authors using statistical package for social sciences (SPSS) version 12.0. Based on their discussions the independent variables were government ownership in a company, corporate transparency and politicians in the BOD.

The mediating variable is the corporate transparency and finally, the dependent variables were Tobin-Q and ROA. Sari and Anugerah identified that on average only 56% of the largest companies’ total information is disclosed in the descriptive analysis.

In regression analysis they analyzed H1, H2, H3 and H4 and they managed to obtain results that were significant. Their findings led them to conclude that government ownership does not have a negative effect on transparency and firm performance.

Sari and Anugerah research results have been well formulated and are academically acceptable from my view. Their method of data collection is credible and their sources are credible.

The use of SPSS provides clear analyses results for both qualitative and quantitative data, which is valid in this study. The formulation of their hypotheses is also articulated well and relevant to the study.

Work Cited

Sari, Ria N. and Anugerah, Rita. “The effect of political influence and corporate transparency on firm performance: empirical evidence from Indonesian listed companies.” Journal of Modern Accounting and Auditing 7.8; (2011): 773-783.

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