Does corporate governance affect financial reporting quality of politically connected firms?

Lela Nurlaela Wati (), Ramdany Ramdany () and Momon Momon ()
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Lela Nurlaela Wati: STIE Muhammadiyah Jakarta, Indonesia
Ramdany Ramdany: STIE Muhammadiyah Jakarta, Indonesia
Momon Momon: STIE Muhammadiyah Jakarta, Indonesia

Entrepreneurship and Sustainability Issues, 2020, vol. 7, issue 3, 2126-2143

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.

Keywords: quality of financial reporting; political connection; good corporate governance mechanism (search for similar items in EconPapers)
JEL-codes: M40 M41 M49 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:ssi:jouesi:v:7:y:2020:i:3:p:2126-2143

DOI: 10.9770/jesi.2020.7.3(45)

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