Political Connection and Credit Risk Management: Its Effect on Bank’s Performance

Fahmi Setiadi(1*), Y Anni Aryani(2)

(1) Department of Accounting, Faculty of Economics and Business, Universitas Sebelas Maret
(2) Department of Accounting, Faculty of Economics and Business, Universitas Sebelas Maret
(*) Corresponding Author

Abstract

The present study examines the effect of political connection and credit risk management on Indonesian bank’s performance during the declining credit growth period. The present study involved 258 banks that registered in the Indonesian Stock Exchange from 2012 to 2017 as the sample of the study. Company political connection was measured using headcount index, credit risk management was measured by its credit risk value or NPL, and the company financial performance was measured based on Return on Asset. The data of the study were obtained from banks and Indonesian Stock Exchange annual report. The result of regression analysis showed that Indonesian bank’s political connection positively and significantly affected financial performance, and credit risk significantly affected bank’s financial performance. This result implied that banks in Indonesia needs political connection and improve their credit risk management in order to improve their financial performance during the declining credit growth period. The present study reveals a new fact that in order to maintain financial performance during the declining credit growth period, banking institution may utilize their political connection and improve their credit risk management.

Keywords: Political Connection, Credit Risk Management, Bank Performance, Credit Growth

Full Text:

PDF

References

Aebi, V., Sabato, G., & Schmid, M. (2011). Risk management, corporate governance, and bank performance in the financial crisis. J. Bank Finance, doi:10.1016/j.jbankfin.2011.10.020

Bao, X., Johan, S., & Kutsuna, K. (2016). Do political connections matter in accessing capital markets? Evidence from China. Emerging Markets Review, 29, 24–41. https://doi.org/10.1016/j.ememar.2016.08.009

Barton, T.L., Shenkir, W.G., Walker, P.L., 2002. Making Enterprise Risk Management Pay Off: How Leading Companies Implement Risk Management. Financial Times/Prentice Hall PTR., Upper Saddle River, NJ.

Braam, G., Nandy, M., Weitzel, U., & Lodh, S. (2015). Accrual-based and real earnings management and political connections. International Journal of Accounting, 50(2), 111–141. https://doi.org/10.1016/j.intacc.2013.10.009

Chen, C. R., Li, Y., Luo, D., & Zhang, T. (2017). Helping hands or grabbing hands? An analysis of political connections and firm value. Journal of Banking and Finance, 80, 71–89. https://doi.org/10.1016/j.jbankfin.2017.03.015

Chen, H. K., Liao, Y. C., Lin, C. Y., & Yen, J. F. (2018). The effect of the political connections of government bank CEOs on bank performance during the financial crisis. Journal of Financial Stability, 36, 130–143. https://doi.org/10.1016/j.jfs.2018.02.010

Cheng, L. (2017). Estimating the value of political connections in China: Evidence from sudden deaths of politically connected independent directors. Journal of Comparative Economics, (March), 1–20. https://doi.org/10.1016/j.jce.2017.10.001

Deng, Z., Yan, J., & van Essen, M. (2018). Heterogeneity of political connections and outward foreign direct investment. International Business Review, (January), 0–1. https://doi.org/10.1016/j.ibusrev.2018.02.001

Ding, S., Jia, C., Wu, Z., & Zhang, X. (2014). Executive political connections and firm performance: Comparative evidence from privately-controlled and state-owned enterprises. International Review of Financial Analysis, 36, 153–167. https://doi.org/10.1016/j.irfa.2013.12.006

Djojosoedarso, S. (2003). Prinsip-Prinsip Manajemen Resiko dan Asuransi, Edisi Revisi. Jakarta: Salemba Empat.

Fu, J., Shimamoto, D., & Todo, Y. (2017). Can firms with political connections borrow more than those without? Evidence from firm-level data for Indonesia. Journal of Asian Economics, 52, 45–55. https://doi.org/10.1016/j.asieco.2017.08.003

Gordon, L. A., Loeb, M. P., & TSeng, C. (2009). Enterprise risk management and firm performance: A contingency perspective. J. Account. Public Policy, 28, 301–327

Habib, A., Muhammadi, A. H., & Jiang, H. (2017). Political connections, related party transactions, and auditor choice: Evidence from Indonesia. Journal of Contemporary Accounting and Economics, 13(1), 1–19. https://doi.org/10.1016/j.jcae.2017.01.004

Hou, Q., Hu, M., & Yuan, Y. (2017). Corporate innovation and political connections in Chinese listed firms. Pacific Basin Finance Journal, 46(November 2016), 158–176. https://doi.org/10.1016/j.pacfin.2017.09.004

Hoyt, R.E., Liebenberg, A.P., 2009. The value of enterprise risk management. Working Paper.

Hung, C. H. D., Jiang, Y., Liu, F. H., Tu, H., & Wang, S. (2017). Bank political connections and performance in China. Journal of Financial Stability, 32, 57–69. https://doi.org/10.1016/j.jfs.2017.09.003

Hussain Alkdai, H. K., & Hanefah, M. M. (2012). Audit committee characteristics and earnings management in Malaysian Shariah-compliant companies. Business & Management Review, 2(2), 52–61. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=78392157&site=ehost-live&scope=site

Jensen, M.C. and W.H. Meckling. 1976. “Theory of the firm: Managerial Behavior, Agency Costs and Ownership structure.” Journal of Financial Economics 3, 305-360

Jolevska, E. D. & Andovski, I. (2014). Non performing loan in the Banking Systems of Serbia, Croatia and Macedonia: Comparative analysis. Ekohomhka, 61(1), 115-130.

Kansil, D., Murni, S., & Tulung, J. E. (2017). Pengaruh Risiko Perbankan Terhadap Kinerja Keuangan Tahun 2013-2015 (Bank Pembangunan Daerah Se-Indonesia). Jurnal EMBA, 5(3), 3508-3517.

Lehne, J., Shapiro, J. N., & Vanden Eynde, O. (2018). Building connections: Political corruption and road construction in India. Journal of Development Economics, 131(November 2016), 62–78. https://doi.org/10.1016/j.jdeveco.2017.10.009

Ling, L., Zhou, X., Liang, Q., Song, P., & Zeng, H. (2016). Political connections, overinvestments and firm performance: Evidence from Chinese listed real estate firms. Finance Research Letters, 18, 328–333. https://doi.org/10.1016/j.frl.2016.05.009

Muttakin, M. B., Monem, R. M., Khan, A., & Subramaniam, N. (2015). Family firms, firm performance and political connections: Evidence from Bangladesh. Journal of Contemporary Accounting and Economics, 11(3), 215–230. https://doi.org/10.1016/j.jcae.2015.09.001

Nair, G. K., Purohit, H., & Choudhary, N. (2014). Influence of Risk Management on Performance: An Empirical Study of International Islamic Bank. International Journal of Economics and Financial Issues, 4(3), 549-563.

Nocco, B.W., Stulz, R.M., 2006. Enterprise risk management: theory and practice. Journal of Applied Corporate Finance 18 (4), 8–20.

Nurunnabi, M. (2015). Advances in Accounting , incorporating Advances in International Accounting The impact of cultural factors on the implementation of global accounting standards ( IFRS ) in a developing country. International Journal of Cardiology, 31(1), 136–149. https://doi.org/10.1016/j.adiac.2015.03.015

Nys, E., Tarazi, A., & Trinugroho, I. (2014). Political connections, bank deposits, and formal deposit insurance. Journal of Financial Stability, 19, 83–104. https://doi.org/10.1016/j.jfs.2015.01.004

Riyadi, Selamet, 2015. Banking Assets And Liability Management, Lemabag Penerbit Fakultas Ekonomi Universitas Indonesia

Rumokoy, L. J., Neupane, S., Chung, R. Y., & Vithanage, K. (2017). Underwriter network structure and political connections in the Chinese IPO market. Pacific Basin Finance Journal, (November 2016), 1–16. https://doi.org/10.1016/j.pacfin.2017.10.005

Schweizer, D., Walker, T., & Zhang, A. (2018). Cross-border acquisitions by Chinese enterprises: The benefits and disadvantages of political connections. Journal of Corporate Finance. https://doi.org/10.1016/j.jcorpfin.2017.12.023

Sutopo Trinugroho, I., Damayanti, S.M., B. (2017). Politically connected banks: Someevidence, 18(1), 83–94.

Wang, F., Xu, L., Zhang, J., & Shu, W. (2018). Political connections, pengendalian internaland firm value: Evidence from China’s anti-corruption campaign. Journal of Business Research, 86(January), 53–67. https://doi.org/10.1016/j.jbusres.2018.01.045

Wu, W., Wu, C., Zhou, C., & Wu, J. (2012). Political connections, tax benefits and firm performance: Evidence from China. Journal of Accounting and Public Policy, 31(3), 277–300. https://doi.org/10.1016/j.jaccpubpol.2011.10.005

DOI: 10.23917/reaksi.v4i3.8520

Article Metrics

Abstract view(s): 769 time(s)
PDF: 811 time(s)

Refbacks

  • There are currently no refbacks.