The hidden costs of politically connected firms under two different regimes in Indonesia

PurposeWe investigate the relation between political connections and the level of financial distress based on Indonesian listed companies from 2010 to 2022 in two different regimes.Design/methodology/approachThe final sample is 3,505 firm-year observations. To estimate the associations, we apply Ordinary Least Squares (OLS) regression, Logistic Regression, Stratified Analysis, and several additional tests, including endogeneity tests using the generalized method of moments (GMM).FindingsThe results show that firms with politically connected board of commissioners experience higher levels of financial distress. Additionally, we find that politically connected firms face greater financial distress during leadership transitions due to political instability and policy changes.Research limitations/implicationsWe limit our investigation on SBY (Susilo Bambang Yudhoyono) and JKW (Joko Widodo) regimes. Another limitation is political connection information which relies on information published in the annual report. Also, we only use the Altman Z-score model to estimate financial distress.Practical implicationsWe extend the literature by highlighting the interplay among political connections, political regimes, and financial distress. Additionally, our study has implications for policymakers to improve corporate governance regulations by considering political factors.Originality/valueWe first address the impact of political connections via board of commissioner members on financial distress in two different regimes in an emerging economy.