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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)
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    References listed on IDEAS

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    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. 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.
    3. repec:bla:jfinan:v:58:y:2003:i:3:p:1301-1327 is not listed on IDEAS
    4. 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.
    5. 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.
    6. 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.
    7. 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.
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    Cited by:

    1. 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.
    2. 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.
    3. 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.

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    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

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