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Finance, Accounting and Business Analysis 
Volume 2 Issue 2, 2020 

http://faba.bg 

 

Political Connections and Characteristics of The LQ-45 Index 

Companies in Indonesia 

 
Kamilia Syaputra, Ernie Hendrawaty 
  
Faculty of Economics and Business, Lampung University, Indonesia 

Info Articles  
 

Abstract 

History Article: 

Submitted 23 January 2020 

Revised 4 March 2020 
Accepted 17 May 2020 

 
Objective: Political activity relates to the activities of a State. Political activities also 

can influence decision-making and power. Companies often use politics in 

executing corporate strategies. The corporate is indicted for having political 
affiliation or engaging in political activity if one or more of its board of directors, 
commissioners, or shareholders is involved in political activity. This study aimed to 
seem at the political connections and characteristics of companies that are politically 
connected and without political connections within the Indonesia LQ-45 Index. 

Methodology: The samples during this study were 21 political-connected companies 
and five companies with no political connections within the Indonesian stock 
market for 2014-2018. The statistical model wont to test the hypothesis is the 
Ordinary least squares regression (OLS) Method. Results: The results show that the 
difference between politically connected and non-politically connected companies is 
apparent within the company's leverage, but does not show any significant impact 

on the tax and profitability of the LQ-45 Index companies during the amount 2014-
2018. Political connections can only support the financing of enterprise debt. 

Implication: Characteristics of politically connected and non-politically connected 
companies are only reflected in leverage corporate but have no effect on tax and 
profitability payments to the LQ-45 Index companies during the period 2014-2018. 

Political connections can only support the financing of enterprise debt. 

Keywords:  
Political connection, leverage, 
tax, profitability. 

 

  

   

Address Correspondence:   
E-mail : kamiliasyaputra.ks@gmail.com 
 
 

 

  



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INTRODUCTION 

 
Political activities influence decision-making and power. The economic performance of State-owned 

Companies is related to the progress and development of the existing business. Companies often use politics in 

executing company strategies to achieve specific goals. According to Wulandari (2012), businesses can support 

a country's political activities through funding. Politically connected companies have easier access to corporate 
operating regulations. Built-in political connections can impact investment decisions and the company's 

activities. Most companies in Indonesia, especially the LQ-45 index companies, are politically connected 

companies. 
Politically connected companies have more privileges in their business activities than companies without 

political connections. Politically connected companies have easy access to government-related projects. The 

closer the company has to the relationship, the more profitable it is to the company, whether it is in the 

business of obtaining funding or from its policy side. 
Faccio (2010) states that politically connected companies have leverage higher, pay lower taxes, and have 

higher market power; however, they have worse accounting performance than unrelated companies. Research 

in Indonesia by Kamaludin (2010) on political support for leverage. Kamaludin (2010) found that there is a 
link between political support for leverage, the case in Indonesia is increasing the size of the company (size) 

amount of leverage only for informal political support (SPI). 

Political connections are considered to have a lower tax payment on companies with political connections. 

Politically connected companies enjoy lower tax rates of 29.67% for politically connected companies and 
32.7% for non-politically connected companies (Faccio, 2010). The difference reached 3.03% between 

politically connected and non-politically connected companies. Through the political cycle, it is predicted that 

tax evasion is concentrated among SOEs, especially those closely related to the government (Chen et al., 
2015).  The papers show that there is a close link between political connections to the reduction of corporate 

tax payments. Political connections are considered to provide equal benefits to corporations and political 

actors. 

Government-related projects such as State infrastructure development are more likely to be dealt with by 
political connections. Having a political connection will affect the profits the company generates due to 

increased sales.  

However, would the profits made by the company be comparable to the political investment the company 

produces? So it is indicated that companies with political connections have lower performance than companies 
without political connections. The results of the Wulandari (2018) study show that politically connected 

companies have lower corporate performance than non-politically connected companies where ROA measures 

corporate performance. This study also uses ROA as a measure of company performance. Selling price factors 
are thought to play a more significant role in determining the performance of the company. Political 

connections to the board of commissioners have a significant negative impact on the performance of the 

Wulandari company (2018). In contrast to the Wulandari (2018), study results of the study of Osamwonyi et 

al. (2013) found that the composition of the board of commissioners and the political connection does not 
affect corporate performance had. 

This study will look at the political connections and company characteristics of the politically connected 

and non-politically connected companies from the side of the leverage, tax, and corporate profitability of LQ-
45 Index Companies. 

 

Literature Review 

 

Theory of Agency 

The managerial and institutional ownership can help to reduce Jensen and Meckling (1976) agency 

conflict. These are the two main mechanisms in corporate governance. The opportunity for institutional 
owners to own company shares also needs to be considered by the company owner. In the event of a 

compromise made by a majority of institutional investors with the management of vulnerable companies 

neglecting the interests of minority shareholders. 

The political connections that companies use to get special treatment compared to others will eventually 
make their business more accessible. Besides, political connections can also harm the company or even loss. 

Losses arise when politicians use their influence on corporate decisions for their political gain. It violated the 

application of Good Corporate Governance and led to the practice of agency theory. 
 

Political Connections and Leverage 

The study conducted by Khwaja and Mian (2005) show that connected companies in Pakistan enjoy 

greater access to debt financing, despite showing a higher default rate, and they do not pay higher interest rates 

than their counterparts. Nevertheless, those who are not politically connected. Research from Kamaludin 



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(2010) also shows the impact of political connections on leverage corporate during the new era until 2010 in 
Indonesia. Kamaludin (2010) also found that there is a link between political support for leverage. The case in 

Indonesia is that the size of the company's amount leverages greater just for informal political support. 

 

Political Connections and Taxes 

Taxes are obligations that citizens must pay to be counted as State income. The company is required to 
pay taxes on the results of its operations. The higher the profit earned by the company, the higher the taxes 

that must be paid to the State. Although only a small percentage of corporate income is used to pay taxes, 

many companies are thinking of lowering or reducing their tax payments by using political connections. 
Companies with political connections are considered to be able to minimize tax payments due to their 

proximity to the State apparatus. Also, tax deductions are obtained by the company by increasing the 

company's debt. Debt inflation will, therefore, reduce the tax rate as interest payments arising from debt 

activities can reduce taxable income and thus increase tax savings and increase corporate value (Chandra, 
2008). Faccio (2010) explains that companies that are politically connected tend to pay lower taxes than 

companies that are not politically connected. 

 

Political Connections and Profitability 

The role of political connections in the company in generating profits due to increased sales can also play a 
role in the performance of the company. Faccio (2010) and Wulandari (2018) show that political connections 

have a significant negative impact on corporate performance. In Habibah's (2018) study, the positive and 

significant political connections to corporate performance were measured through ROA and ROE. While the 
results of Ligita and Muazaroh's (2019) study found that there was no effect of political connections on firm 

performance measured using ROA and ROE. Political connections allow for lower corporate performance. 

 

Hypotheses development and research methods 

According to the mentioned theoretical and conceptual framework and based on the study’s problem, 
questions and objectives, our hypotheses are placed as follows: 

Hypotheses (1): Companies with political connections have leveraged higher than non-political companies 

in the Indonesian Stock Exchange LQ-45 Index for the period 2014-2018. 
Hypotheses (2): Politically connected companies make lower tax payments than non-politically connected 

companies in the Indonesian Stock Exchange LQ-45 Index for the period 2014-2018. 

Hypotheses (3): Politically connected Return On Assets companies have lower than non-politically 

connected companies in the Indonesian Stock Exchange LQ-45 Index Company for the period 2014-2018. 
Data in this study are financial statements and company ownership reports obtained from the annual 

report of companies listed on the Indonesian Stock Exchange (BEI) Index LQ45 from 2014 to 2018. Samples 

at this study was a company that was listed on the LQ-45 Index for the period 2014-2018 and never exited the 
LQ-45 Index (consistent). The total sample of this study was 26 companies, with 21 politically connected 

companies and five companies with no political connections. 

The political connection criteria are divided into three SPs for Government Support, SF for Formal 

Support, and SI for Informal Support. The SP criterion is a corporation owned by the government, the SF 
corporation with its board of directors or its commissioner is either directly involved in the political party or 

holding office in the government, and the SI is the criterion with political connections seen from the board of 

directors or commissioners having proximity to the State or politicians like family ties. 
This study uses Ordinary Least Squares Regression (OLS). The study was conducted in four regression 

models to detect better the impact of political connections on the company's Leverage, Tax, and Profitability. 

The first model of political connections was made in a variable dummy with a sample of all politically 

connected firms through SP, SF, and SI of 1 and 0 for non-politically connected companies. In model two, 
political connections are seen from Government Support (SP), model three political connections seen from 

Formal Support (SF), and model four political support seen from Informal Support (SI). 

The way to detect a company by having a political connection is to list the names of the board of directors 
and board of directors listed on each company, and then search for that name individually in Google search 

engines. Google's search engine can help to find an individual's electronic track record, especially a ruler or 

someone who has been in power before. If one or more names in the ranks of the board of commissioners and 

directors are involved in political relations or are presently serving as state leaders and are active in political 
party activities, then this political connection belongs to Formal political support.  

When it is found that one or more ranks of the board of commissioners and or directors have served as 

heads of government, have been active in a political party, and have close ties to such authorities as family 
relations or have previously provided (supportive) leadership currently in office. When a company has one of 

these criteria, it is said to be politically connected. 

This study uses Debt to Asset Ratio (DAR) as a measure of leverage corporate by dividing total corporate 



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debt by total assets. Company tax payments are calculated by dividing the company's earnings by taxable 
income. Moreover, the company's profitability is calculated using Return On Asset Ratio (ROA) is the division 

of a company's net profit by its total assets. Size is used as a control variable calculated using the Log of total 

assets. The regression equation is as follows: 

 

Model 1 

Leverage/Tax/ Profitability  = α + β1DConnected + β2Size + ε 
Model 2 

Leverage/Tax/ Profitability  = α + β1DSP + β2Size + ε 
Model 3 

Leverage/Tax/ Profitability  = α + β1DSF + β2Size + ε 
Model 4 

Leverage/Tax/ Profitability  = α + β1DSI + β2Size + ε 
 

DISCUSSION 

 
The focus of this study was to impact of political connections on leverage corporate, tax payments, and 

profitability. The descriptive statistics table shows the leverage of that the political companies connected with 

political connections are 56.57% for companies with political connections and 42.48% of companies without 
political connections. On corporate tax payments, it shows that companies with no political connections pay 

lower taxes than those with political connections of 23.92% and 25.89% of companies with political 

connections. Corporate ROA indicates that politically connected companies have lower profitability than firms 

without political connections of 0.81 and 0.89 owned by companies without political connections. 
 

Table 1. Descriptive Statistics  

 Connected Parties Without Political Connections 

 Mean Median Mean Median 

leverage 0.530000 0.424810 0.370000   0.564725 
Tax 0.258970 0.243740 0.239241 0.252736 

ROA 0.047200 0.089560 0.098900   0.081542 
Size 8.083356 7.659762 7.885201 7.790394 

 

Samples are grouped according to the criteria of political connections that support the Government (SP), 

Formal Support (SF), and Informal Support (SI) and companies with no Political Connection. Companies that 

have been politically connected with governmental support will dissolve political connections with Formal 
Support and Informal Support. The rest of the sample is then grouped for Formal and Informal Support 

political connections. When it is found that the sample has Formal support, it will dissolve Informal Support, 

though it is implied that Formal Support will also have Informal Support, and the rest is political connections 
with Informal support. 

Table 1 shows the average leverage of companies with higher political connections than those without 

political connections. Average corporate tax payments indicate that companies with political connections have 

a higher average payout than companies without political connections, but the differences between them are 
not significantly different. The average company ROA indicates that companies with political connections 

have lower ROAs and larger company sizes than companies without political connections. 

 
 

  



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Table 2. Regression Results of Corporate Characteristics 

 Leverage Tax Profitability 

 Panel A. Political Connection Across Criteria (Model 1) 

Variable Coefficient t-Statistic  Coefficient t-Statistic    Coefficient t-Statistic  

C 0.001 0.164  0.159 2.932 *** -0.389 -1.129  

D(DPOL) 0.286 2.209 **       
D(SIZE) 0.019 3.071 ***       

DPOL    0.005 0.310  -0.098 -0.737  
SIZE    -0.005 -1.031  -0.063 -1.505  

TAX (-1)    0.532 7.061 ***    
LOGROA(-1)       0.653 9.616 *** 

Observasi 130 129 130 
R-Squared 0.140 0.326 0.491 

Adjusted R-Squared 0.126 0.309 0.479 

F-Statistic 10.27 20.014 40.315 
Prob. (F-Statistic) 0.000 0.000 0.000 

 Panel B. Government Support (Model 2) 

Variable Coefficient t-Statistic  Coefficient t-Statistic    Coefficient t-Statistic  

C -0.025 -0.305  0.235 3.363 *** -0.429 -1.276  

DSP 0.085 1.531  0.009 0.293  -0.253 -1.202  
D(SIZE) 0.017 1.693 * -0.012 -1.693 * -0.043 -1.026  
DAR(-1) 0.729 9.819 ***       
TAX (-1)    0.426 4.343 ***    

LOGROA(-1)       0.698 8.437 *** 

Observasi 85 84 85 

R-Squared 0.696 0.270 0.601 
Adjusted R-Squared 0.684 0.242 0.586 

F-Statistic 61.153 9.756 40.238 

Prob. (F-Statistic) 0.000 0.000 0.000 

 Panel C. Formal Support (Model 3) 

Variable Coefficient t-Statistic  Coefficient t-Statistic  Coefficient t-Statistic  

C -0.260 -1.192454  0.134 1.454  0.436 0.601  

DSF 0.009 0.291291  -0.005 -0.460  0.156 1.116  
SIZE 0.047 1.472015  -0.002 -0.231  -0.167 -1.703 * 

DAR(-1) 0.772 8.595050 ***       
TAX (-1)    0.519 3.444 ***    

LOGROA(-1)       0.664190 5.896017 *** 

Observasi 45 42 45 

R-Squared 0.671 0.303 0.624 

Adjusted R-Squared 0.646 0.249 0.595 
F-Statistic 27.262 5.532 22.137 

Prob. (F-Statistic) 0.000 0.002 0.000 

 Panel D.  Informal Support (Model 4) 

Variable Coefficient t-Statistic  Coefficient t-Statistic  Coefficient t-Statistic  

C -0.063 -0.418  0.156 1.704  0.058 1.218  
DSI -0.009 -0.288  0.024 1.138  -0.005 -0.523  
SIZE 0.020 1.070  -0.003 -0.323  -0.003 -0.538  

DAR(-1) 0.796 8.082 ***       
TAX (-1)    0.464 3.573 ***    
ROA(-1)       0.620 5.343 *** 

Observasi 50 50 50 
R-Squared 0.609 0.323 0.408 

Adjusted R-Squared 0.583 0.277 0.368 

F-Statistic 23.456 7.157 10.355 
Prob. (F-Statistic) 0.000 0.000 0.000 

***  Significant at level 1%; **Significant at level 5%; Significant at level 10% 
 

 



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The company with political connections in a research sample of 21 companies and five companies 
with no political connections. The political support of the government in the research sample of 12 

companies, including the three financial institutions, namely Bank Negara Indonesia Tbk, Bank Rakyat 

Indonesia Tbk, and Bank Mandiri Persero Tbk, formal support of four companies, informal support of five 

companies and companies without the political support of five company.  
Panel A is the result of a political connection with all the criteria using a single model. The results in 

panel A show that political connections have a significant influence on leverage but do not show 

significant results on tax and ROA. Panel B, C, and D results show no significant relationship between 
political connections and specific criteria for leverage, tax, and ROA. The positive coefficient indicates 

that the leverage of politically connected companies has leverage higher than the non-politically connected 

companies on the Indonesian Stock Exchange LQ-45 index. The result supports the findings of Kamaludin 

(2010) and (Faccio, 2010) that firms that are politically connected tend to have easier access to debt. 
Judging by the amount of leverage owned by the company, Bank Rakyat Indonesia Tbk holds the 

highest value. Companies are considered good when they can capitalize on their potential debt. If the total 

amount of capital-funded assets is too large, then the company is also considered to be wasting potential 
debt to support the company, but if the debt amount is too much, it will put the financial burden on the 

company. The assumption in this study is that the higher the value of leverage, then the easier it is to 

access debt. 

The results obtained concerning taxpayer-funded corporate tax returns without any political 
connection showed insignificant results. These results contradict Ferdiawan and Firmansyah (2017) and 

Faccio (2010), who state that politically connected companies utilize their political connections to obtain 

lower tax payments. Taxes are an obligation to be paid to the State. Tax violations will be actionable and 
subject to sanctions, from both tax administration sanctions to tax evasion sanctions. So there is no 

bargaining in terms of tax payments for even politically connected companies. 

The results show that there is no difference in the ROA of politically connected and non-politically 

connected companies. This result is in line with the study of Ligita and Muazaroh (2019), who found no 
effect on political connection to corporate performance (ROA). Any effects of political connection to the 

company do not give a significant result to the profitability of the company. So there is no difference in 

corporate profitability between politically connected and non-politically connected. 
These results are contrary to Faccio (2010) and Wulandari (2018). Faccio (2010) found that connected 

companies had lower productivity than unrelated companies in four of the seven Countries, the connected 

firms showed lower ROA in all countries except Japan; the difference is significant in Indonesia, Italy, 

Russia, and Thailand. Similar results from the Wulandari (2018) study suggest that political connection 
within the structure of the board of commissioners harms corporate performance. Although the regression 

results show a negative impact on the ROA of a politically connected company, the result cannot be used 

due to insignificant probability 
 

CONCLUSIONS 

 

Characteristics of politically connected and non-politically connected companies are only reflected in 

leverage corporate but have no effect on tax and profitability payments to the LQ-45 Index companies 
during the period 2014-2018. Political connections can only support the financing of enterprise debt. 

After conducting further analysis and review of the findings, the researchers noted that there are some 

weaknesses in this study that could be further studied. First, this research focuses only on the Indonesian 

Stock Exchange LQ-45 Index and has not done a comprehensive study on the entire company on the 
Indonesian Stock Exchange. Second, The results of this study have not seen the impact of corporate 

earnings and have not yet compared inter-industry companies on the Indonesian Stock Exchange. 

Further research is recommended to look at the effect of political connections on corporate earnings 
and to compare differences between companies that are politically connected and not, in order to see the 

difference between corporate and non-politically connected corporate earnings and to add independent 

variables or controls other than political connections. 

 

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Faccio, M., 2010. Differences Between Politically Connected and Non-Connected Firms: A Cross 
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