Political connections, overinvestment and governance mechanism in Indonesia

Figures & data

Table 1. Variable definitions

Variable	Definition	Data Source
Dependent Overinvestment (OVERI)	OVERI1 = the higher the positive residual, the higher the overinvestment (Su et al., 2013). OVERI2 = the overinvestment is residual with value more than 0 (OVERI2, Richardson (2006))	OSIRIS
Independent Political Connections (OVERI)	A dummy variable defined by Bank Indonesia Regulation Number 12/3/PBI/2010 article 11, coded 1 if match the definition, 0 otherwise.	Annual report
Control
INDIRECTOR	The ratio of a firm’s independent directors to total directors.	OSIRIS
SUBS	The natural logarithm of number of subsidiaries.	OSIRIS
BIG4	A dummy variable, coded 1 for firm who hire one of the Big 4 auditors (Deloitte, PwC, Ernest&Young, and KPMG), and 0 for otherwise.	OSIRIS
SIZE	The natural logarithm of the company’s total assets at the end of the fiscal year.	OSIRIS
AGE	The number of years the firms has been listed.	OSIRIS
TOBINSQ	The ratio between the firm’s market value of equity and debt over its total assets.	OSIRIS
LEV	Total liability divided by total assets at the end of the year.	OSIRIS
ROA	Income before extraordinary items (net profit after tax) divided by total assets.	OSIRIS
CASH	The balance of cash deflated by total assets.	OSIRIS
LNSALES	The natural logarithm of sales.	OSIRIS
INDUSTRY	A vector of indicator variables to capture industry fixed effects.	OSIRIS
YEAR	A vector of indicator variables to capture year fixed effects.	OSIRIS

Table 2. Sample distribution

Panel A: sample breakdown by year
	OVERI1						OVERI2
	Politically Connected		Non-politically Connected		Total		Politically Connected		Non-politically Connected		Total
Year	N	%	N	%	N	%	N	%	N	%	N	%
2012	82	81.19	19	18.81	101	100	45	84.91	8	15.09	53	100
2013	91	79.82	23	20.18	114	100	50	81.97	11	18.03	61	100
2014	101	78.29	28	21.71	129	100	55	78.57	15	21.43	70	100
2015	108	78.26	30	21.74	138	100	49	75.38	16	24.62	65	100
2016	216	72.97	80	27.03	296	100	107	69.48	47	30.52	154	100
2017	186	69.92	80	30.08	266	100	98	70.00	42	30.00	140	100
Total	784	75,10	260	24.90	1,044	100	404	74.40	139	25.60	543	100
Panel B: sample breakdown by industry
	OVERI1						OVERI2
	Politically Connected		Non-politically Connected		Total		Politically Connected		Non-politically Connected		Total
Industry	N	%	N	%	N	%	N	%	N	%	N	%
(SIC 0) Agriculture, Forestry and Fisheries	37	67.27	18	32.73	55	100	28	68.29	13	31.71	41	100
(SIC 1) Mining	183	85.92	30	14.08	213	100	126	85.14	22	14.86	148	100
(SIC 2) Construction Industries	178	69.53	78	30.47	256	100	55	63.95	31	36.05	86	100
(SIC 3) Manufacturing	93	69.92	40	30.08	133	100	33	58.93	23	41.07	56	100
(SIC 4) Transportations, Communications and Utilities	135	83.33	27	16.67	162	100	80	80.81	19	19.19	99	100
(SIC 5) Wholesale & Retail Trade	80	68.38	37	31.18	117	100	40	65.57	21	34.43	61	100
(SIC 7) Service Industries	64	68.82	29	31.18	93	100	29	76.32	9	23.68	38	100
(SIC 8) Health, Legal, and Educational Services and Consulting	14	93.33	1	6.67	15	100	13	92.86	1	7.14	14	100
Total	784	75,10	260	24.90	1,044	100	404	74.40	139	25.60	543	100
Panel C: sample breakdown by types of political connections
	OVERI1						OVERI2
	Politically Connected		Non-politically Connected		Total		Politically Connected		Non-politically Connected		Total
Types of Political Connections	N	%	N	%	N	%	N	%	N	%	N	%
MINISTRY (Menteri/Kementrian)	746	71.46	298	28.54	1,044	100	383	70.53	160	29.47	543	100
ORGANIZATION	516	49.43	528	50.57	1,044	100	261	48.07	282	51.93	543	100
MILITARY	467	44.73	577	55.27	1,044	100	257	47.33	286	52.67	543	100
SOE (BUMN-Badan Usaha Milik Negara)	454	43.49	590	56.51	1,044	100	237	43.65	306	56.35	543	100
DPR (Dewan Perwakilan Rakyat)	361	34.58	683	65.42	1,044	100	186	34.25	357	65.75	543	100
MPR (Majelis Permusyawaratan Rakyat)	353	33.81	691	66.19	1,044	100	174	32.04	369	67.96	543	100

All the panels above display the sample distribution of 1,044 and 543 companies that have political and non political connections listed on the IDX in 2012–2017.

Panel A displays the sample distribution breakdown by year.

Panel B displays the sample distribution breakdown by industry.

Panel C displays the sample distribution breakdown by types of political connections.

Table 3. Descriptive Statistics

	Mean	Median	Minimum	Maximum
Panel A: Descriptive Statistics Measured by Overinvestment from Su et al. Method
OVERI1	0.014	−0.009	−0.147	0.307
PCON	0.751	1.000	0.000	1.000
INDIRECTOR	0.114	0.125	0.000	0.333
SUBS	1.866	1.946	0.000	5.124
BIG4	0.451	0.000	0.000	1.000
SIZE	29.030	29.070	24.952	32.344
AGE	14.545	14.000	2.000	32.000
TOBINSQ	0.517	0.490	0.069	1.924
LEV	0.516	0.489	0.069	1.923
ROA	2.969	2.640	−32.110	39.160
CASH	0.097	0.066	0.001	0.497
LNSALES	21.473	21.643	16.138	25.069
Panel B: Descriptive Statistics Measured by Overinvestment from Richardson Method
OVERI2	0.071	0.059	0.000	0.257
PCON	0.744	1.000	0.000	1.000
INDIRECTOR	0.124	0.143	0.000	0.333
SUBS	1.917	1.946	0.000	5.124
BIG4	0.368	0.000	0.000	1.000
SIZE	29.021	29.107	24.952	32.344
AGE	8.910	7.000	2.000	28.000
TOBINSQ	0.540	0.526	0.069	1.924
LEV	0.539	0.525	0.069	1.923
ROA	2.154	2.460	−32.110	39.160
CASH	0.090	0.062	0.001	0.497
LNSALES	21.238	21.486	16.138	25.069

Panel A shows descriptive statistics for all the variables used in this study. The sample used in this study amounted to 1,044 companies listed on the IDX in 2012–2017.

Panel B shows descriptive statistics for all the variables used in this study. The sample used in this study amounted to 543 companies listed on the IDX in 2012–2017.

Table 4. T-Test

Panel A: t-Test Measured by Overinvestment from Su et al. Method (N = 1,044)
	Politically Connected N = 784	Non-politically Connected N = 260	Coef	t value
OVERI1	0.016	0.009	0.007	−1.121
INDIRECTOR	0.115	0.112	0.003	−0.424
SUBS	2.007	1.442	0.565***	−7.567
BIG4	0.473	0.385	0.089**	−2.493
SIZE	29.315	28.172	1.143***	−10.587
AGE	14.588	14.415	0.173	−0.283
TOBINSQ	0.531	0.477	0.054***	−2.628
LEV	0.529	0.476	0.053***	−2.617
ROA	3.175	2.348	0.827	−1.159
CASH	0.099	0.092	0.007	−0.944
LNSALES	21.772	20.569	1.204***	−9.020
Panel B: t-Test Measured by Overinvestment from Richardson Method (N = 543)
	Politically Connected N = 404	Non-politically Connected N = 139	Coef	t value
OVERI2	0.068	0.078	−0.010*	1.711
INDIRECTOR	0.124	0.126	−0.002	0.198
SUBS	2.040	1.558	0.482***	−4.659
BIG4	0.391	0.302	0.089*	−1.878
SIZE	29.260	28.325	0.936***	−6.622
AGE	9.012	8.612	0.401	−0.637
TOBINSQ	0.555	0.497	0.058**	−2.008
LEV	0.554	0.496	0.058**	−2.004
ROA	2.430	1.353	1.077	−1.191
CASH	0.095	0.074	0.021**	−2.231
LNSALES	21.507	20.458	1.048***	−5.802

Panel A shows the characteristics of companies that have political and non-political connections CEOs from 1,044 companies listed on the IDX in 2012-2017.

Panel B shows the characteristics of companies that have political and non-political connections CEOs from 543 companies listed on the IDX in 2012-2017.

The t-test results are displayed with significance at 10%, 5% and 1%.

Table 5. Pearson’s correlation

	[1]	[2]	[3]	[4]	[5]	[6]	[7]	[8]	[9]	[10]	[11]	[12]
Panel A: Pearson’s Correlation Measured by Overinvestment from Su et al. Method
[1] OVERI1	1.000
[2] PCON	0.035	1.000
	(0.262)
[3] INDIRECTOR	−0.039	0.013	1.000
	(0.212)	(0.672)
[4] SUBS	0.185***	0.228***	−0.076**	1.000
	(0.000)	(0.000)	(0.014)
[5] BIG4	−0.067**	0.077**	−0.086***	0.231***	1.000
	(0.029)	(0.013)	(0.006)	(0.000)
[6] SIZE	0.082***	0.312***	−0.184***	0.575***	0.364***	1.000
	(0.008)	(0.000)	(0.000)	(0.000)	(0.000)
[7] AGE	−0.333***	0.009	−0.147***	0.013	0.141***	0.053*	1.000
	(0.000)	(0.777)	(0.000)	(0.664)	(0.000)	(0.086)
[8] TOBINSQ	−0.007	0.081***	−0.007	0.035	−0.081***	0.090***	0.058*	1.000
	(0.824)	(0.009)	(0.827)	(0.262)	(0.009)	(0.003)	(0.061)
[9] LEV	−0.007	0.081***	−0.007	0.035	−0.081***	0.090***	0.057*	1.000***	1.000
	(0.830)	(0.009)	(0.826)	(0.262)	(0.009)	(0.003)	(0.064)	(0.000)
[10] ROA	0.009	0.036	−0.043	0.017	0.225***	0.143***	0.082***	−0.364***	−0.366***	1.000
	(0.772)	(0.247)	(0.167)	(0.580)	(0.000)	(0.000)	(0.008)	(0.000)	(0.000)
[11] CASH	−0.091***	0.029	−0.026	0.024	0.125***	0.039	0.022	−0.291***	−0.292***	0.369***	1.000
	(0.003)	(0.345)	(0.394)	(0.431)	(0.000)	(0.211)	(0.474)	(0.000)	(0.000)	(0.000)
[12] LNSALES	−0.010	0.269***	−0.200***	0.475***	0.423***	0.803***	0.138***	0.113***	0.113***	0.310***	0.183***	1.000
	(0.737)	(0.000)	(0.000)	(0.000)	(0.000)	(0.000)	(0.000)	(0.000)	(0.000)	(0.000)	(0.000)
Panel B: Pearson’s Correlation Measured by Overinvestment from Richardson Method
[1] OVERI2	1.000
[2] PCON	−0.073*	1.000
	(0.088)
[3] INDIRECTOR	0.103**	−0.008	1.000
	(0.016)	(0.843)
[4] SUBS	0.004	0.196***	−0.143***	1.000
	(0.933)	(0.000)	(0.001)
[5] BIG4	−0.079*	0.080*	−0.090**	0.246***	1.000
	(0.067)	(0.061)	(0.037)	(0.000)
[6] SIZE	0.058	0.274***	−0.189***	0.591***	0.385***	1.000
	(0.180)	(0.000)	(0.000)	(0.000)	(0.000)
[7] AGE	−0.431***	0.027	−0.127***	0.201***	−0.007	0.064	1.000
	(0.000)	(0.525)	(0.003)	(0.000)	(0.879)	(0.139)
[8] TOBINSQ	−0.114***	0.086**	−0.048	0.109**	−0.013	0.168***	0.322***	1.000
	(0.008)	(0.045)	(0.268)	(0.011)	(0.756)	(0.000)	(0.000)
[9] LEV	−0.114***	0.086**	−0.047	0.109**	−0.014	0.169***	0.322***	1.000***	1.000
	(0.008)	(0.046)	(0.270)	(0.011)	(0.749)	(0.000)	(0.000)	(0.000)
[10] ROA	0.022	0.051	0.051	−0.029	0.198***	0.135***	−0.168***	−0.408***	−0.409***	1.000
	(0.617)	(0.234)	(0.231)	(0.495)	(0.000)	(0.002)	(0.000)	(0.000)	(0.000)
[11] CASH	−0.002	0.095**	0.054	0.062	0.178***	0.098**	−0.173***	−0.259***	−0.260***	0.325***	1.000
	(0.962)	(0.026)	(0.206)	(0.148)	(0.000)	(0.023)	(0.000)	(0.000)	(0.000)	(0.000)
[12] LNSALES	−0.021	0.242***	−0.176***	0.444***	0.419***	0.735***	0.012	0.168***	0.168***	0.366***	0.287***	1.000
	(0.628)	(0.000)	(0.000)	(0.000)	(0.000)	(0.000)	(0.781)	(0.000)	(0.000)	(0.000)	(0.000)

Panel A shows the characteristics of companies that have political and non-political connections CEOs from 1,044 companies listed on the IDX in 2012–2017.

***Correlation is significant at the 1% level (two-tailed); **correlation is significant at the 5% level (two-tailed); *correlation is significant at the 10% level (two-tailed).

Panel B shows the characteristics of companies that have political and non-political connections CEOs from 543 companies listed on the IDX in 2012–2017.

***Correlation is significant at the 1% level (two-tailed); **correlation is significant at the 5% level (two-tailed); *correlation is significant at the 10% level (two-tailed).

Table 6. Political connection and overinvestment

	Prediction Sign	OVERI1	OVERI2	OVERI1	OVERI2
PCON	-			−0.007*	−0.010*
				(−1.87)	(−1.75)
INDIRECTOR	-/+	−0.013	0.055**	−0.010	0.059**
		(−0.78)	(2.34)	(−0.58)	(2.46)
SUBS	+	0.008***	0.004	0.009***	0.004
		(4.25)	(1.51)	(4.32)	(1.52)
BIG4	-	−0.008***	−0.012**	−0.009***	−0.012**
		(−2.67)	(−2.29)	(−2.75)	(−2.34)
SIZE	+	0.011***	0.009***	0.011***	0.009***
		(5.76)	(3.37)	(5.93)	(3.60)
AGE	-	−0.002***	−0.005***	−0.002***	−0.005***
		(−10.93)	(−8.98)	(−10.64)	(−8.88)
TOBINSQ	-/+	−2.656***	0.064	−2.565***	0.202
		(−3.84)	(0.03)	(−3.80)	(0.10)
LEV	-/+	2.651***	−0.061	2.561***	−0.199
		(3.83)	(−0.03)	(3.79)	(−0.10)
ROA	+	0.001***	0.000	0.001***	0.000
		(3.10)	(0.21)	(3.03)	(0.15)
CASH	-	−0.064***	−0.027	−0.064***	−0.026
		(−4.02)	(−1.03)	(−4.07)	(−0.98)
LNSALES	-	−0.010***	−0.004**	−0.010***	−0.004**
		(−6.43)	(−2.34)	(−6.36)	(−2.15)
_cons	?	0.050	−0.047	0.040	−0.060
		(1.40)	(−0.80)	(1.13)	(−1.03)
Industry Dummies		Yes	Yes	Yes	Yes
Year Dummies		Yes	Yes	Yes	Yes
r^2		0.699	0.273	0.701	0.278
N		1044	543	1044	543

This table shows the results of ordinary least square regressions between overinvestment and politically connections with sample of 1,044 and 543 companies listed on the IDX 2012–2017 with significance at 10%, 5% and 1%.

Table 7. Additional interaction test between political connection with number of subsidiaries, ratio of independent directors, audited by big 4 auditors and overinvestment

		OVERI1			OVERI2
	Prediction Sign	[1]	[2]	[3]	[1]	[2]	[3]
[1] PCON_INDIRECTOR	-	−0.082*			−0.163***
		(−1.94)			(−2.75)
[2] PCON_SUBS	+		0.001			0.005
			(0.20)			(0.99)
[3] PCON_BIG4	-			−0.002			−0.006
				(−0.30)			(−0.52)
[4] PCON	-	0.003	−0.008	−0.006	0.011	−0.018**	−0.008
		(0.54)	(−1.20)	(−1.06)	(1.45)	(−1.99)	(−1.01)
[5[INDIRECTOR	+	0.051	−0.009	−0.010	0.184***	0.059**	0.057**
		(1.30)	(−0.58)	(−0.61)	(3.21)	(2.48)	(2.38)
[6] SUBS	+	0.008***	0.008*	0.009***	0.003	0.000	0.004
		(4.34)	(1.88)	(4.31)	(1.16)	(0.04)	(1.56)
[7] BIG4	-	0.000	−0.009***	−0.007	0.000	−0.013**	−0.007
		(.)	(−2.77)	(−1.21)	(.)	(−2.44)	(−0.78)
[8] SIZE	+	0.011***	0.011***	0.011***	0.010***	0.009***	0.009***
		(6.06)	(5.91)	(5.95)	(4.12)	(3.62)	(3.61)
[9] AGE	-	−0.002***	−0.002***	−0.002***	−0.004***	−0.005***	−0.005***
		(−10.49)	(−10.63)	(−10.56)	(−8.46)	(−8.82)	(−8.78)
[10] TOBINSQ	-/+	−2.712***	−2.572***	−2.550***	0.305	0.065	0.282
		(−3.98)	(−3.83)	(−3.75)	(0.16)	(0.03)	(0.15)
[11] LEV	-/+	2.708***	2.568***	2.546***	−0.304	−0.062	−0.279
		(3.97)	(3.82)	(3.74)	(−0.16)	(−0.03)	(−0.14)
[12] ROA	+	0.001***	0.001***	0.001***	0.000	0.000	0.000
		(3.06)	(3.04)	(3.03)	(0.12)	(0.25)	(0.13)
[13] CASH	-	−0.064***	−0.064***	−0.064***	−0.027	−0.024	−0.025
		(−4.06)	(−4.06)	(−4.06)	(−1.05)	(−0.92)	(−0.96)
[14] LNSALES	-	−0.010***	−0.010***	−0.010***	−0.005**	−0.004**	−0.004**
		(−6.49)	(−6.35)	(−6.45)	(−2.47)	(−2.24)	(−2.20)
_cons	?	0.037	0.041	0.040	−0.089	−0.049	−0.060
		(1.05)	(1.15)	(1.11)	(−1.56)	(−0.85)	(−1.04)
Industry Dummies		Yes	Yes	Yes	Yes	Yes	Yes
Year Dummies		Yes	Yes	Yes	Yes	Yes	Yes
r2		0.702	0.701	0.701	0.292	0.279	0.278
N		1044	1044	1044	543	543	543

t statistics in parentheses

* p < 0.1, ** p < 0.05, *** p < 0.01

Table 8. Additional interaction test between political connection and overinvestment using coarsened exact matching

PANEL A
	PCON = 0	PCON = 1
All	260	784
Matched	224	471
Unmatched	36	313
PANEL B
All	139	404
Matched	108	268
Unmatched	31	136

Table

PANEL C
	Prediction Sign	OVERI1	OVERI2	OVERI1	OVERI2
PCON	-			−0.005	−0.008*
				(−1.27)	(−1.76)
INDIRECTOR	-/+	−0.015	0.059**	−0.013	0.060**
		(−0.74)	(2.26)	(−0.62)	(2.31)
SUBS	+	0.010***	0.005*	0.010***	0.004*
		(3.64)	(1.78)	(3.65)	(1.71)
BIG4	-	−0.007*	−0.015***	−0.008**	−0.016***
		(−1.89)	(−2.70)	(−2.01)	(−2.82)
SIZE	+	0.009***	0.009***	0.009***	0.009***
		(3.91)	(4.03)	(3.95)	(4.07)
AGE	-	−0.002***	−0.005***	−0.002***	−0.005***
		(−9.91)	(−7.45)	(−9.65)	(−7.47)
TOBINSQ	-/+	−2.005***	0.228	−1.958***	0.500
		(−3.18)	(0.11)	(−3.02)	(0.25)
LEV	-/+	1.996***	−0.234	1.949***	−0.507
		(3.16)	(−0.11)	(3.01)	(−0.25)
ROA	+	0.001***	−0.000	0.001***	−0.000
		(2.97)	(−0.22)	(2.87)	(−0.38)
CASH	-	−0.087***	0.007	−0.087***	0.007
		(−3.24)	(0.24)	(−3.21)	(0.22)
LNSALES	-	−0.011***	−0.005**	−0.011***	−0.004**
		(−5.43)	(−2.47)	(−5.39)	(−2.20)
_cons	?	0.105**	−0.057	0.099**	−0.064
		(2.52)	(−1.03)	(2.39)	(−1.16)
Industry Dummies		Yes	Yes	Yes	Yes
Year Dummies		Yes	Yes	Yes	Yes
r2		0.626	0.349	0.627	0.354
N		695	376	695	376

t statistics in parentheses

* p < 0.1, ** p < 0.05, *** p < 0.01

Su, Z. Q., Fung, H. G., & Yau, J. (2013). Political connections and corporate overinvestment: Evidence from China. International Journal of Accounting and Information Management, 21(4), 285–296. https://doi.org/10.1108/IJAIM-02-2013-0006

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