Abstract
This study aims to examine the effect of related party transactions (RPTs) on banks’ performance and investigates political connections as moderator in their causal relationship. Our sample is 40 Indonesian banks listed on the Indonesian Stock Exchange for the years 2013–2016 with 160 observations as panel data. Based on panel data regression test, our results demonstrate that account receivables-related RPTs have a positive effect on banks’ profitability and its market performance (Tobin’s Q), but there are consequences of high operating costs and the risk of non-performing loans. Banks receive more funds from their related parties (account payables-related RPTs), banks exhibit higher capital capability and lower market performance. Further, the political connection index in banks significantly affect banks’ capability, liquidity, efficiency, and market value through RPTs. This result indicates that political connection strengthens the effects of RPTs on banks’ performance. Although this study has limited information in determining political connections and has not considered macroeconomic conditions, these findings imply that political connection plays an important role in banks’ performance in Indonesia.
Highlights
Agency problem distorts reported earnings (Watts and Zimmerman 1986) and eventually leads to the discrepancy between accounting-based financial performance and market performance
The results imply that the political connection index moderates the effects of related party transactions (RPTs) on banks’ operating expense efficiency and bank’s market performance
This study indicates that political connection strengthens the effects of RPTs on banks’ capability, profitability, non-performing loans, liquidity, efficiency, and market value, so the second hypothesis is supported
Summary
Agency problem distorts reported earnings (Watts and Zimmerman 1986) and eventually leads to the discrepancy between accounting-based financial performance and market performance. One of the transactions that potentially imply high agency problem is related party transactions (RPTs). With the ownership structure dominated by family ownership (Claessens et al 2000, Habib et al 2017), Indonesian firms are more susceptible to expropriation by majority shareholders on minority shareholders’ interests through RPTs (Friedman et al 2003). According to Gordon et al (2004) RPTs enables firms to minimize transaction costs with other parties so it is called the efficient transaction hypothesis, or facilitates propping up, i.e., enhancing firm performance (Cheung et al 2009). The adverse effect of RPTs, or the conflict of interest hypothesis, enables majority shareholders to inflict a loss to minority shareholders (Gordon et al 2004) or to facilitate tunneling, i.e., the expropriation of firm assets for their interests (Cheung et al 2009). The adverse effect of RPTs, or the conflict of interest hypothesis, enables majority shareholders to inflict a loss to minority shareholders (Gordon et al 2004) or to facilitate tunneling, i.e., the expropriation of firm assets for their interests (Cheung et al 2009). Jian and Wong (2003), Gordon et al (2004), Cheung et al (2009), Wahab et al (2011), and Nekhili and Cherif
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