Political connections, internal conflicts of interest, earnings management, and investment inefficiency: additional evidence from Indonesia

The main purpose of this study is to provide further insights into the relationship between political connections, firms’ internal conflicts of interests, earnings management, and investment inefficiency in the Indonesian capital market. While most studies focus on the opportunistic behaviour of politically connected firms, this study explore the possibility of accountable behaviour of politically connected firms. Using an original dataset for a sample of Indonesian listed firms, the findings of the empirical analysis provides empirical evidence to show that the behaviour of politicians in politically connected firms is influenced by internal and external factors.The main contribution of the thesis is providing novel evidence that shows that politicians in politically connected firms can act responsibly when necessary. As a result, politically connected firms are associated with the reduction of principal-principal and principal-agent conflicts, lower level of real and discretionary accruals earnings management activities and lower level of investment inefficiency, either in the form of over-investment, under-investment or overall level of investment inefficiency. Moreover, this study also provides novel evidence to support the complementary relationship between political connections and corporate governance quality, contrasting previous studies results on the substitutionary relationship between the two factors.The results of this study could change how academicians and practitioners view the impact of political connections. Academicians have a new angle and avenue of research on the role of politicians in a politically connected firm, while the results should also strengthen the demand for improvement of corporate governance quality and transparency for investors and regulators around the world