The effect of political connections on firms’ performance: The moderating role of leverage

Abstract

This study seeks to examine the impact of political connections on firms’ performance and the moderating role of leverage on this causal relationship. As an emerging country, Indonesia offers an interesting research setting for this research. Our sample is 471 Indonesian publicly listed firms in 2014–2017, yielding 1,884 firm-year observations. This study uses two indicators as the proxies for firms’ performance: accounting (ROA) and market performance (Tobins’Q). We operationalize political connections with the number of politically connected officials in a firm. Leveraged is measured by dividing total liabilities by total assets at the end of the year. Based on the panel data regression test, our results demonstrate that political connections decrease firms’ market and accounting performance. Further, the results empirically show that leverage strengthens the effect of political connections on firms’ performance. This study contributes to the literature by adding empirical evidence on applying the agency theory to investigate the impact of political connections on firm performance in an emerging country like Indonesia. Furthermore, Indonesia’s multi-party political system offers a research context distinct from other countries.