The investment behavior of politically connected firms in Indonesia

Abstract

PurposeThe authors examine the effect of the politically connected supervisory board (PV_SVP) on corporate investment behavior in Indonesia in the period of 2015–2019.Design/methodology/approachThe authors use Indonesian listing companies as our sample. Ordinary Least Squares regression is applied to investigate this association. Also, the authors address the endogeneity problem by using the generalized method of moments.FindingsThe authors find that firms with political connections through Supervisory Boards (SBs) are negatively significantly associated with corporate investment. Our results are robust to alternative measures and to test for endogeneity.Research limitations/implicationsThe authors contribute to prior research by showing empirical findings on the investment behavior of politically connected firms using an emerging economy context, Indonesia, which has a unique political landscape. The authors offer practical implications for practitioners and policymakers, such as improving the corporate governance system and promoting better investment opportunities by establishing a transparent and competitive environment.Originality/valueOur study differs from other studies due to different corporate governance and political connection settings. While most prior studies examine the investment behavior of politically connected firms using the Chinese context, the authors use Indonesia which has different political and governance landscapes. Indonesia applies a two-tier board system that promotes the strategic role of the political supervisory board.