IDEAS home Printed from https://ideas.repec.org/a/ssi/jouesi/v7y2020i3p2126-2143.html
   My bibliography  Save this article

Does corporate governance affect financial reporting quality of politically connected firms?

Author

Listed:
  • Lela Nurlaela Wati

    (STIE Muhammadiyah Jakarta, Indonesia)

  • Ramdany

    (STIE Muhammadiyah Jakarta, Indonesia)

  • Momon

    (STIE Muhammadiyah Jakarta, Indonesia)

Abstract

Political connections raise the issue of corporate governance in the disclosure of information. The purpose of this study was to examine the effect of political connections, the effectiveness of the board of commissioners and audit committees, and the quality of external audits on the quality of the company's financial statements. Using a sample of large companies in the Indonesian capital market as many as 871 samples. Regression analysis panel data was used for this analysis. It was found that political connections negatively affect on the quality of financial reporting. The quality of financial reporting of a politically connected firm is lower than those of politically unconnected firms. The effectiveness of the board of commissioners and audit committee is not effective enough in carrying out the internal monitoring function in the company. The influence of political connections can contribute to weak corporate governance and contribute to the low quality of financial reporting. The results of this study are expected to be a reference for investors to determine investment preferences in politically connected companies or not. For management, the results of this study are expected to be a consideration in recruiting the board of commissioners and other policies. Policymakers must encourage or mandate companies to disclose clearer information about the company's relationship with government, political parties, or politicians so that investors and all interested parties can use this information to better assess the quality of the company's financial statements. This study is the first trial to examine more comprehensively the role of political connections, the effectiveness of the board of commissioners and audit committee and the impact of external audit on the quality of financial reporting.

Suggested Citation

  • Lela Nurlaela Wati & Ramdany & Momon, 2020. "Does corporate governance affect financial reporting quality of politically connected firms?," Entrepreneurship and Sustainability Issues, VsI Entrepreneurship and Sustainability Center, vol. 7(3), pages 2126-2143, March.
  • Handle: RePEc:ssi:jouesi:v:7:y:2020:i:3:p:2126-2143
    DOI: 10.9770/jesi.2020.7.3(45)
    as

    Download full text from publisher

    File URL: https://jssidoi.org/jesi/uploads/articles/27/Wati_Does_corporate_governance_affect_financial_reporting_quality_of_politically_connected_firms.pdf
    Download Restriction: no

    File URL: https://jssidoi.org/jesi/article/511
    Download Restriction: no

    File URL: https://libkey.io/10.9770/jesi.2020.7.3(45)?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Christian Leuz & Felix Oberholzer-Gee, "undated". "Political Relationships, Global Financing and Corporate Transparency," Center for Financial Institutions Working Papers 03-16, Wharton School Center for Financial Institutions, University of Pennsylvania.
    2. Xie, Biao & Davidson, Wallace III & DaDalt, Peter J., 2003. "Earnings management and corporate governance: the role of the board and the audit committee," Journal of Corporate Finance, Elsevier, vol. 9(3), pages 295-316, June.
    3. Leuz, Christian & Oberholzer-Gee, Felix, 2006. "Political relationships, global financing, and corporate transparency: Evidence from Indonesia," Journal of Financial Economics, Elsevier, vol. 81(2), pages 411-439, August.
    4. Leuz, Christian & Nanda, Dhananjay & Wysocki, Peter D., 2003. "Earnings management and investor protection: an international comparison," Journal of Financial Economics, Elsevier, vol. 69(3), pages 505-527, September.
    5. repec:bla:jfinan:v:58:y:2003:i:3:p:1301-1327 is not listed on IDEAS
    6. Ronald C. Anderson & David M. Reeb, 2003. "Founding‐Family Ownership and Firm Performance: Evidence from the S&P 500," Journal of Finance, American Finance Association, vol. 58(3), pages 1301-1328, June.
    7. George Batta & Ricardo Sucre Heredia & Marc Weidenmier, 2014. "Political Connections and Accounting Quality under High Expropriation Risk," European Accounting Review, Taylor & Francis Journals, vol. 23(4), pages 485-517, December.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Lela Nurlaela Wati & Momon & Dwi Cahyono, 2023. "Double-Edged Sword of Controlling Shareholders on Politically Connected Group Business," Economic Studies journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 1, pages 75-91.
    2. Sunday Oseiweh Ogbeide & Henry Usunobun Ogiugo & Isaac Olufemi Adesuyi, 2021. "Corporate governance mechanisms and financial reporting quality of commercial banks in Nigeria," Insights into Regional Development, VsI Entrepreneurship and Sustainability Center, vol. 3(1), pages 136-146, March.
    3. Sunday Oseiweh Ogbeide & Henry Usunobun Ogiugo & Isaac Olufemi Adesuyi, 2021. "Corporate governance mechanisms and financial reporting quality of commercial banks in Nigeria," Post-Print hal-03583879, HAL.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Art Durnev & Sergei Guriev, 2007. "The Resource Curse: A Corporate Transparency Channel," Working Papers w0108, Center for Economic and Financial Research (CEFIR).
    2. Arindam Banik & Chanchal Chatterjee, 2021. "Ownership Pattern and Governance–Performance Relation: Evidence from an Emerging Economy," Global Business Review, International Management Institute, vol. 22(2), pages 422-441, April.
    3. Chanchal Chatterjee, 2020. "Board Quality and Earnings Management: Evidence from India," Global Business Review, International Management Institute, vol. 21(5), pages 1302-1324, October.
    4. Setia-Atmaja, Lukas & Haman, Janto & Tanewski, George, 2011. "The role of board independence in mitigating agency problem II in Australian family firms," The British Accounting Review, Elsevier, vol. 43(3), pages 230-246.
    5. Jara-Bertin, Mauricio & López-Iturriaga, Félix J., 2008. "Earnings Management and Contest to the Control: An Analysis of European Family Firms," MPRA Paper 9660, University Library of Munich, Germany.
    6. Jesus Sáenz González & Emma García-Meca, 2014. "Does Corporate Governance Influence Earnings Management in Latin American Markets?," Journal of Business Ethics, Springer, vol. 121(3), pages 419-440, May.
    7. Fan, Joseph P.H. & Gillan, Stuart L. & Yu, Xin, 2013. "Property rights, R&D spillovers, and corporate accounting transparency in China," Emerging Markets Review, Elsevier, vol. 15(C), pages 34-56.
    8. Daeheon Choi & Chune Young Chung & Young-Eun Kim & Ye Jun Kim & Paul Moon Sub Choi, 2020. "Sustainable Corporate Ownership Structures and Earnings Management in the Vietnamese Stock Market," Sustainability, MDPI, vol. 12(15), pages 1-32, July.
    9. Anh Huu Nguyen & Thu Minh Thi Vu & Quynh Truc Thi Doan, 2020. "Corporate Governance and Stock Price Synchronicity: Empirical Evidence from Vietnam," IJFS, MDPI, vol. 8(2), pages 1-13, April.
    10. Mehdi Bouras & Mohamed Imen Gallali, 2017. "Earnings Management, Equity-based Compensation, Economic Conjuncture and Governance Mechanisms: A Comparative Study between France and the United States," International Journal of Economics and Financial Issues, Econjournals, vol. 7(2), pages 585-600.
    11. Doidge, Craig & Andrew Karolyi, G. & Stulz, Rene M., 2007. "Why do countries matter so much for corporate governance?," Journal of Financial Economics, Elsevier, vol. 86(1), pages 1-39, October.
    12. Hussein A. Abdou & Nouran N. Ellelly & Ahmed A. Elamer & Khaled Hussainey & Hassan Yazdifar, 2021. "Corporate governance and earnings management nexus: Evidence from the UK and Egypt using neural networks," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 6281-6311, October.
    13. Paugam, Luc, 2011. "Valorisation et reporting du goodwill : enjeux théoriques et empiriques," Economics Thesis from University Paris Dauphine, Paris Dauphine University, number 123456789/8007 edited by Casta, Jean-François.
    14. Sandvik, Jason, 2020. "Board monitoring, director connections, and credit quality☆," Journal of Corporate Finance, Elsevier, vol. 65(C).
    15. Yik-Pui Low, Steven & Foo, Yee-Boon & Gul, Ferdinand A, 2023. "Corporate lobbying: Resource-seeking or rent-seeking? Evidence from audit fees," Journal of Contemporary Accounting and Economics, Elsevier, vol. 19(1).
    16. Kim, Incheol & Miller, Steve & Wan, Hong & Wang, Bin, 2016. "Drivers behind the monitoring effectiveness of global institutional investors: Evidence from earnings management," Journal of Corporate Finance, Elsevier, vol. 40(C), pages 24-46.
    17. Alzoubi, Ebraheem Saleem Salem, 2018. "Audit quality, debt financing, and earnings management: Evidence from Jordan," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 30(C), pages 69-84.
    18. Jean J. Chen & Haitao Zhang, 2014. "The Impact of the Corporate Governance Code on Earnings Management – Evidence from Chinese Listed Companies," European Financial Management, European Financial Management Association, vol. 20(3), pages 596-632, June.
    19. Jun Hyeok Choi & Saerona Kim & Ayoung Lee, 2019. "CEO Tenure, Corporate Social Performance, and Corporate Governance: A Korean Study," Sustainability, MDPI, vol. 12(1), pages 1-17, December.
    20. Liangbo Ma & Shiguang Ma & Gary Tian, 2017. "Corporate Opacity and Cost of Debt for Family Firms," European Accounting Review, Taylor & Francis Journals, vol. 26(1), pages 27-59, January.

    More about this item

    Keywords

    quality of financial reporting; political connection; good corporate governance mechanism;
    All these keywords.

    JEL classification:

    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • M49 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Other

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ssi:jouesi:v:7:y:2020:i:3:p:2126-2143. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Manuela Tvaronaviciene (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.