Related Party Transactions, Political Connection, and Firm Performance

Evidence from Indonesia

Bibliographic Data

ID22006862
AuthorsSung-Tae Lee (0000-0002-2189-7780, Hongik University), Sun-Moon Jung (0000-0003-2073-7707, Dongguk University), Sun Moon Jung (Dongguk University, corresponding author), Nilamsari Putri Utami (University of Indonesia)
Year2026
Volume16
Issue1
Publication date2026-01-01
Open AccessYes
TypeARTICLE
VenueSAGE Open (JOURNAL)
Journal identifiersISSN: 2158-2440 • E-ISSN: 2158-2440
PublisherSAGE Publications (PUBLISHER • US)
DOI10.1177/21582440251386608
OpenAlexW7124691327
LanguageEN
References cited46

Related party transactions (RPTs) enhance firm value by reducing transaction costs under incomplete information but may harm firm value when used as an instrument for expropriating a firm’s wealth. Focusing on the worsening of agency problems due to political connection, we explore how the effects of RPTs on firm performance differ across firms based on their level of political connection. Using manually collected data on RPTs and the political connections of Indonesian listed firms from 2007 to 2018, we find that, on average, financial RPTs are negatively associated with accounting performance but positively associated with stock returns. This reflects the mixed evidence from prior studies that RPTs have both positive and negative consequences on firm value. We further examine whether politically connected firms are more likely to commit to value-destroying RPTs. We find that RPTs are negatively associated with stock returns specifically when a firm is closely tied to politicians or government officials. Overall, our findings suggest that political connection may facilitate value-destroying RPTs, muting their positive effects on firm value. JEL Classification: G32, G34

Agency cost · Commit · Enterprise value · Harm · Politics · Auditing, Earnings Management, Governance · Corporate Finance and Governance · Political Influence and Corporate Strategies

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