Political Connections, Blockholder Ownership, and Tax Avoidance: Evidence from Indonesia

Lutfi Yuli Handoko, Maria Mediatrix Ratna Sari, I Gusti Ngurah Agung Suaryana, I Gusti Made Asri Dwija Putri

Abstract


We study the effect of political connections on tax avoidance, as well as the role of blockholder ownership in moderating the effect of political connections on tax avoidance. Using panel data of 102 companies listed on the Indonesia Stock Exchange during 2016–2019, we find evidence of the positive and significant effect of political connections on tax avoidance. Political connections’ existence within the company could encourage tax avoidance. We also discover that blockholder ownership plays a role in weakening the effect of political connections on tax avoidance in Indonesia, a country with numerous companies having concentrated ownership. The higher the percentage of shares owned by the blockholder, the lower the level of tax avoidance, thus mitigating agency problem II related to entrenchment and expropriation of minority shareholders.


Keywords


agency problem II; political connections; blockholder; tax avoidance

Full Text:

PDF

References


Budiardjo, M. (2007). Dasar-Dasar Ilmu Politik (Edisi Revi, Vol. 148). Gramedia Pustaka Utama.

Claessens, S., Djankov, S., Fan, J. P. H., & Lang, L. H. P. (2002). Disentangling the Incentive and Entrenchment Effects of Large Shareholdings. Journal of Finance, LVII(6), 2741–2771. https://doi.org/10.1111/1540-6261.00511

Claessens, S., Feijen, E., & Laeven, L. (2008). Political Connections and Preferential Access to Finance: The Role of Campaign Contributions. Journal of Financial Economics, 88(3), 554–580. https://doi.org/10.1016/j.jfineco.2006.11.003

Cobham, A., Garcia-Bernardo, J., Palanský, M., & Monsour, M. B. (2020). The State of Tax Justice 2020 : Tax Justice in the time of COVID-19. Tax Justice Network, November, 1–83. https://www.taxjustice.net/reports/the-state-of-tax-justice-2020/

De La Cruz, A., Medina, A., & Tang, Y. (2019). Owners of the World’s Listed Companies. OECD Capital Market Series, Paris. https://www.oecd.org/corporate/Owners-of-the-Worlds-Listed-Companies.htm

Desai, M. A., & Dharmapala, D. (2008). Tax and Corporate Governance. Tax and Corporate Governance, January 2008. https://doi.org/10.1007/978-3-540-77276-7

Dyreng, S. D., Hanlon, M., & Maydew, E. L. (2008). Long-Run Corporate Tax Avoidance. Accounting Review, 83(1), 61–82. https://doi.org/10.2308/accr.2008.83.1.61

Edmans, A. (2014). Blockholders and Corporate Governance. Annual Review of Financial Economics, 6, 23–50. https://doi.org/10.1146/annurev-financial-110613-034455

Faccio, M. (2006). Politically Connected Firms. American Economic Review, 96(1), 369–386. https://doi.org/10.1257/000282806776157704

Faccio, M. (2007). The characteristics of politically connected firms. Purdue CIBER Working Papers, 51(006), 1–34.

Ferdiawan, Y., & Firmansyah, A. (2017). Pengaruh Political Connection, Foreign Activity, dan Real Earnings Management Terhadap Tax Avoidance. Jurnal Riset Akuntansi Dan Keuangan, 5(3), 1601–1624.

Fisman, R. (2001). Estimating the Value of Political Connections. Source: The American Economic Review, 91(4), 1095–1102.

Goldman, E., Rocholl, J., & So, J. (2009). Political Connections and The Allocation of Procurement Contracts. Review of Finance, 17(5), 1–32.

Hanlon, M., & Heitzman, S. (2010). A Review of Tax Research. Journal of Accounting and Economics, 50(2–3), 127–178. https://doi.org/10.1016/j.jacceco.2010.09.002

Harymawan, I., & Nowland, J. (2016). Political connections and earnings quality: How do connected firms respond to changes in political stability and government effectiveness? International Journal of Accounting and Information Management, 24(4), 339–356. https://doi.org/10.1108/IJAIM-05-2016-0056

Houston, J. F., Jiang, L., Lin, C., & Ma, Y. (2014). Political Connections and the Cost of Bank Loans. Journal of Accounting Research, 52(1), 193–243. https://doi.org/10.1111/1475-679X.12038

Jensen, M. C., & Meckling, W. H. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure. Journal of Financial Economics, 3(4), 305–360.

Johnson, S., & Mitton, T. (2001). Cronyism and Capital Controls: Evidence From Malaysia. National Bureau of Economic Research, 8521.

Kamila, P. A. (2014). Analisis Hubungan Agresivitas Pelaporan Keuangan Dan Agresivitas Pajak Pada Saat Terjadinya Penurunan Tarif Pajak. Finance and Banking Journal, 16(2), 228–245.

Kim, C. (Francis), & Zhang, L. (2016). Corporate Political Connections and Tax Aggressiveness. Contemporary Accounting Research, 33(1), 78–114. https://doi.org/10.1111/1911-3846.12150

La Porta, R., Lopez-De-Silanes, F., & Shleifer, A. (1999). Corporate Ownership Around the World. The Journal of Finance, LIV(2), 471–517.

Leuz, C., & Oberholzer-Gee, F. (2006). Political Relationships, Global Financing and Corporate Transparency: Evidence from Indonesia. Journal of Financial Economics, 81(2), 411–439. https://doi.org/10.1016/j.jfineco.2005.06.006

Li, H., Meng, L., Wang, Q., & Zhou, L. A. (2008). Political connections, financing and firm performance: Evidence from Chinese private firms. Journal of Development Economics, 87(2), 283–299. https://doi.org/10.1016/j.jdeveco.2007.03.001

Lins, K. V., & Warnock, F. E. (2004). Corporate Governance and The Shareholder Base. International Finance Discussion Paper, 2004(816), 1–42. https://doi.org/10.17016/ifdp.2004.816

Mobarak, A. M., & Purbasari, D. P. (2006). Corrupt Protection For Sale To Firms: Evidence from Indonesia. Working Paper, May, 1–48.

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

OECD. (2021). Avoidance, in OECD Glossary of Tax Terms. https://www.oecd.org/ctp/glossaryoftaxterms.htm

OJK. (2014). Roadmap Tata Kelola Perusahaan Indonesia (Indonesia Corporate Governance Roadmap). Indonesia Corporate Governance Roadmap. http://www.ojk.go.id/id/data-dan-statistik.

Pranoto, B. A., & Widagdo, A. K. (2016). Pengaruh Koneksi Politik dan Corporate Governance Terhadap Tax Agressiveness. Syariah Paper Accounting FEB UMS, 1(3), 472–486.

Putra, Z. K. P., & Suhardianto, N. (2020). The Influence of Political Connection on Tax Avoidance. Jurnal Akuntansi Dan Keuangan, 22(2), 82–90. https://doi.org/10.9744/jak.22.2.82-90

Setia-Atmaja, L., Haman, J., & Tanewski, G. (2011). The Role of Board Independence in Mitigating Agency Problem II in Australian Family Firms. British Accounting Review, 43(3), 230–246. https://doi.org/10.1016/j.bar.2011.06.006

Shleifer, A., & Vishny, R. W. (1997). A Survey of Corporate Governance Andrei. PhD Proposal, 1(2), 737–783.

Sudibyo, Y. A., & Jianfu, S. (2016). Political Connections, State Owned Enterprises and Tax Avoidance: An Evidence From Indonesia. Corporate Ownership and Control, 13(3continued2), 279–283. https://doi.org/10.22495/cocv13i3c2p2

Tang, T., & Firth, M. (2012). Earnings Persistence and Stock Market Reactions to the Different Information in Book-Tax Differences: Evidence from China. International Journal of Accounting, 47(3), 369–397. https://doi.org/10.1016/j.intacc.2012.07.004

Villalonga, B., & Amit, R. (2006). How Do Family Ownership, Control and Management Affect Firm Value? Journal of Financial Economics, 80(2), 385–417. https://doi.org/10.1016/j.jfineco.2004.12.005

Watts, R. L., & Zimmerman, J. L. (1978). Towards a Positive Theory of the Determination of Accounting Standards. Source: The Accounting Review, 53(1), 112–134. http://www.jstor.org/stable/245729%0Ahttp://about.jstor.org/terms

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

Ying, T., Wright, B., & Huang, W. (2017). Ownership Structure and Tax Aggressiveness of Chinese Listed Companies. International Journal of Accounting & Information Management. https://doi.org/10.1108/IJAIM-07-2016-0070

Zhang, H., Jian, M., & Li, W. (2012). How does state ownership affect tax avoidance? Evidence from China. School of Accountancy: Singapore Management University, 13–18.




DOI: https://doi.org/10.33258/birci.v5i2.4897

Article Metrics

Abstract view : 122 times
PDF - 43 times

Refbacks

  • There are currently no refbacks.


Creative Commons License
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.

 

Creative Commons License
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.