Volume 8, Issue 2, February – 2023 International Journal of Innovative Science and Research Technology

ISSN No:-2456-2165

Role of Political Connections and Family

Ownership to Related Party Transactions in Indonesia
Fuad Hudaya Fatchan1, Ilham Nuryana Fatchan 2
1
Faculty of Economics and Business, Universitas Muhammadiyah Surakarta, Surakarta – Indonesia
2
Faculty of Economics and Business, Universitas Muhammadiyah Purwokerto, Purwokerto - Indonesia

Abstract:- A related party transaction is a transfer of has the ability to influence the financial and operating policies
resources, services or obligations between the reporting of the investee through the presence of control, joint control or
entity and related parties, regardless of whether a price is significant influence. Kang, Lee, Lee & Park (2014) state that
charged. There are several factors that can influence RPT is a transfer of resources, services, or obligations from a
abusive or efficient related party transactions, namely reporting entity to related parties, which usually refers to
family ownership and political connections. This study executives, boards of directors, and major shareholders .
discusses the effect of family ownership and political
connections on related party transactions with control Kohlbeck & Mayhew (2010) stated that RPT can
variables, namely audit quality, firm size, profitability and categorized into 2 namely RPT which has a positive impact or
firm age. This research focuses on mining companies listed efficient transaction if RPT can be used as an efficient and
on the Indonesian stock exchange in 2016-2020 with a profitable contract mechanism for companies to achieve
research sample of 170 companies. Data analysis used shareholder value maximization by reducing transaction costs
Eviews 9 with the Random Effect Model test. The results thereby achieving good economies of scale for the company.
of the study show that family ownership and political RPT can be a management effort to improve company
connections have an effect on related party transactions. performance (Williamson, 1975; Stein, 1997)
Control variables are audit quality, company size,
company age effect on related party transactions. Conversely, the second RPT is detrimental (abusive
Profitability has no effect on related party transactions. RPT) if the related party transaction is used to manipulate the
company's operating results for economic gain which only
Keywords:- Related Party Transactions, Family Ownership, benefits the company's majority shareholder. Yeh, Shu & Su
Political Connections, Audit Quality, Company Size, (2012) state that a detrimental RPT is the appropriation of
Profitability, Company Age. wealth from minority shareholders by majority/ controlling
shareholders.
I. INTRODUCTION
The ownership structure in Indonesia is the same as other
The company's financial statements aim to provide Asian countries which have a concentrated ownership
information regarding the financial position, financial structure in one group such as the family or the state. In
performance and cash flows of entities that are useful to most Indonesia with a concentrated ownership pattern and the main
users of financial statements in making economic decisions owner The dominant (ultimate control) is the family (Arifin,
(statement of financial accounting standart/PSAK No. 1, 2018, 2003). Previous research in Indonesia found that RPT
Paragraph 09). Information contained in a company's financial transactions are in line with family ownership (Barokah, 2013;
statements can be useful if it is presented in a transparent, Dyanty et al 2013). According to a survey conducted by Price
accurate and timely manner when needed by Waterhouse Cooper (PWC ) in 2014, more than 95 percent of
shareholders/creditors and potential investors/creditors to companies in Indonesia are family businesses. Claessen et al.
assess the company's financial condition, as well as the (1999) found that more than 50% of companies in Indonesia
company's going concern, as a basis for decision-making. One are controlled by families.
of the information presented in the report corporate finance is
information about related party transactions or related party Company impact family control on RPT can be explained
transactions (RPT). by entrenchment or alignment effects. The entrenchment
effect is defined as the ability of the ultimate controlling
In Indonesia, RPT is based on statements of financial shareholder to determine the company's operational policy in
accounting standards number 7 of 2014 concerning disclosure accordance with his personal interests, even if he has to
of related parties. A related party transaction is a transfer of sacrifice the interests of the shareholders and other
resources, services or obligations between the reporting entity stakeholders. When the entrenchment effect dominates, family
and related parties, regardless of whether a price is charged. ownership encourages related party transactions to strengthen
According to IAS 24, the RPT relationship is activity normal motivation to expropriate through related party transactions
activities of commerce and business. For example, an entity because control is in the hands of one family controller
often carries out some of its activities through subsidiaries, (Dyanty, 2013). Hu et al (2012) state that there is a lot of
joint ventures and associates. In such circumstances, the entity information owned by family ownership as the controlling

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Volume 8, Issue 2, February – 2023 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
shareholder. Transactions carried out by controlling shares can on firm value. Habib et al. (2017) found that there was a
be used as a means to carry out expropriation of company positive effect political connections to related party
resources which can harm minority shareholders due to transactions. Connected company politics will do RPT. In
tunneling carried out by controlling shareholders. contrast, Abdullatif et al.'s research. (2019) stated Jordan
found that there was no influence between political
Furthermore, the alignment effect occurs when low connections and related party transactions.
family ownership encourages related party transactions to
increase firm value through low costs and effective control so II. RESEARCH METODS
that these transactions can provide benefits for business
development (Fan & Goyal, 2006). Anderson and Reeb (2003) The population of this study are mining sector companies
emphasize that family firms pay more attention to reputation listed on the Indonesia Stock Exchange (IDX) in 2016-2020.
than non-family firms because families expect a continued Selection of the sample using purposive-sampling with
presence in the companies they start. criteria:
 Researchers obtain the complete annual reports of mining
Previous research on RPT with family ownership. sector companies from 2016 to 2020 through the official
Cheyoong et al (2015) examined Malaysian companies using websites of each company and on the official website of
panel data stating that RPT in family firms reduces firm value, the Indonesia Stock Exchange (www.idx.go.id)
expropriation through RPT is stronger in family firms  Companies that include information related to research
compared to non-family firms. Azim et al (2018) examined the variables in their annual reports.
main shareholders of Pakistani family-owned companies who
took over resources through RPT. The results of the study A. Research variable
concluded that there is a relationship between the
concentration of family shareholders and the exploitation of  Related Party Transactions (RPT)
the interests of minority shareholders. This is supported by the In this study, the dependent variable used is related party
research of Mohammed (2019) and Dyanty et al (2013) which transactions (RPT) as seen from the sum of the total RPT sales,
state that RPT will be stronger with family ownership. In RPT purchases, RPT debt and RPT receivables divided by
Berto's research (2019) ownership was reported to have a total assets. The use of these transactions has contributed
positive effect on tunneling. That is, the more concentrated the significantly to the business operations of companies in
shareholders are in accordance with indications of Indonesia.
expropriation. Likewise Abdullatif et al (2019) stated that
companies with high concentration of ownership can use RPT This measurement was chosen because, related party
in tunneling activities to take over funds to dominant transactions have been regulated in PSAK 7 and OJK
shareholders. regulations through Regulation number VIII.G.7 concerning
guidelines for presenting financial statements, one of which
In contrast, Bansal & Thenmozhi (2020) find that has points, namely (a) The company provides details of total
concentrated founder ownership in India is more likely to drive assets, liabilities, sales , and purchase of RPT; (b) The
RPTs that are beneficial to minority shareholders compared to company assigns a percentage value in point (1) to total assets,
RPTs that lead to takeovers. Alhadab et al (2020) which liabilities, sales and purchases; (c) The company provides
showed that there was no effect of family ownership on the debt/receivable values from RPT that are not related to the
RPT relationship. company's main business activities (Nuritomo et al, 2020).

Majority share ownership has an interest in carrying out RPT

RPT activities with political connections to get protection in RPT Sales + RPT Purchases + RPT Debt + RPT Receivables
=
these activities. Agency theory is the theory that underlies the Total Assets
linkages between connections policies and related party
transactions. This theory leads to the linkage of the  Family Ownership
relationship between majority shareholder and minority The family ownership structure is defined as share
shareholder. Having political connections exacerbate type II ownership owned by the family, or the family has an important
agency conflict in which the majority shareholder takes role in the management of the company, so that the aims and
advantage position in the company for their own interests interests of the family are . Bertnard and Schoar (2006) suggest
without prioritizing the shareholders minority shares that family firms are characterized by concentrated ownership,
(Villalonga & Amit, 2006). According to (Ling et al, 2016) control and the presence of one or several family members
stated from the perspective of agency theory, companies that occupying executive positions. For measuring family
are politically connected have the potential to be RPT . ownership using a dummy by looking at the percentage
according to PSAK No. 15 whose measurement uses a
Several previous studies have examined the influence percentage of 20% share ownership.
between political connections and related party transactions.
Ismail et al (2022) researched that many Egyptian companies  Political Connections
are still connected to political boards of directors and political The political connection variable will use 2 indicators,
relations have a significant effect on RPT. Supatmi et al (2021) namely aspects of political ownership owned by independent
stated that political connections strengthen the effect of RPT commissioners and independent commissioners, with criteria,
namely concurrent positions as politicians affiliated with

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ISSN No:-2456-2165
political parties, concurrent positions as government officials, is able to compete in getting business opportunities
concurrent positions as military officials, and former officials (Sembiring, 2012). In addition, the age of the company also
government or former military officials (Fan, 2007 in Pranoto affects the efficiency of the company in carrying out its
Ari, 2014) in. Political connection is measured by a dummy operational activities. In this study, the age of the company
variable. A dummy variable is an artificial variable or dummy will be calculated from the year the company was founded
variable created to quantify qualitative data by giving a code of until the year the observations were made.
0 (zero) or 1 (one) (Main, 2007 : 97 in Dharma and Putu, 2016) Company Age = year of observation - year of company
in (Purwanti & Sugiyarti, 2017) establishment

 Audit Quality  Profitability

Audit quality is the size of the Public Accounting Firm Profitability in this study is proxied by return on assets
used by the company in examining the company's financial (ROA). Return On Assets (ROA) used to measure
statements. The measurement of the Public Accounting Firm management's ability to earn overall profits. The higher the
size variable in this study uses a dummy variable with the ROA owned by a company, the more efficient use of assets
provision that companies that use big four Public Accounting will be increase profits (Madli, 2014). Return on total assets
Firms are given a score of 1 and companies that use non- big (ROA) is calculated by comparing the net profit after interest
four Public Accounting Firms are given a score of 0 ( and taxes with total assets with the following formula:
Abdullatif et al, 2019).
Net Profit after Interest and Tax
 Size ROA =
Total Assets
This research includes size or company size as a control
variable. Company size is an important factor indicating that B. Research Frameworks
large companies are relatively more stable and able to provide
benefits compared to companies with smaller sizes. The
natural logarithm value of the converted total assets. Size has
been widely used in disclosure research as a control variable
(Hamid et al, 2016). In this study everything was converted
into rupiah and in accordance with the rupiah currency that
was in effect at the time this research was conducted.

 Company Age
According to Lee and Choi (2015) the longer the period
of time a company is registered, the higher the possibility that
the company has long-term investment decisions and high
corporate value. Through the age of the company, investors Fig 1 Research Frameworks
can see whether a company is able to continue to survive and

III. RESULTS AND DISCUSSION

A. Research Sample

Table 1 . Research Sample

No Criteria Samples
1 Number of mining companies period 2016-2020 (38 mining companies multiplied by 5 years) 190
2 Number of mining companies in 2010 -2020 who do not present financial reports (not found) 20
Number of final sampled used 170

B. Descriptive Statistics

Table 2. Descriptive Statistics

RPT POL FAM KAP SIZE AGE ROA
Mean 0.063407 0.458824 0.340142 0.476471 20.16222 29.15294 1.790964
Median 0.019613 0.000000 0.317600 0.000000 20.23250 27.50000 0.826000
Maximum 0.930607 1.000000 0.925000 1.000000 29.05046 52.00000 43.48400
Minimum 0.000000 0.000000 0.000000 0.000000 14.65477 4.000000 -153.8300
Std. Dev. 0.124243 0.499774 0.294679 0.500922 2.304949 12.30000 16.05218
N 170 170 170 170 170 170 170
Description: * indicates a significance of 5%; RPT = Accounts payable, receivables, sales and purchases related party
transactions; POL = political connections to company directors or commissioners; FAMILY = Percentage of family share
ownership; KAP = Audit quality; SIZE = Company size; AGE = Age of the company; ROA = company profitability level.

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Volume 8, Issue 2, February – 2023 International Journal of Innovative Science and Research Technology
ISSN No:-2456-2165
Related party transactions (RPT) as measured using the C. Hypothesis testing
sum of related party transactions of sales, purchases, payables Table 3 shows the results of panel data regression testing
and receivables divided by total assets in this study have an using a random effect research model . To test the hypothesis
average of 0.063 with a maximum and minimum value of formulated as follows:
0.930 and 0, respectively. Related party transactions with a
maximum value of 0.930 indicates that the level of related RPT= a + ß1POL+ ß2FO + ß3AQ + ß4SIZE + ß5AGE +
party transactions practiced is high, around 93%. This ß6ROA + e
indicates that the sample firms In this study, the practice of
related party transactions is carried out from several aspects of RPT = Related Party Transaction
transactions such as debts and receivables to achieve certain a = Konstanta
goals. However, there are also those who do not conduct POL = Politic Connection
transactions with related parties in certain years . FO = Family Ownership
AQ = Audit Quality
Family ownership of mining companies in Indonesia is SIZE = Company Size
34.0%. As is known according to PSAK No. 15 regarding AGE = CompanyAge
share ownership, that investors are considered to have ROA = Profitability
influence significant if owning either directly or indirectly e = Error
through the company's shareholding 20% or more of the
investee 's voting rights . It can be concluded that the majority
of mining companies in Indonesia are owned by families.

Table 3. Hypothesis testing

Dependent Variable: RPT
Variable Coefficient Std. Error t-Statistic Prob.
C 0.116119 0.048160 2.411118 0.0170
POL 0.042323 0.016625 2.545687 0.0118*
FAM 0.038021 0.017670 2.151769 0.0329*
KAP -0.027518 0.010835 -2.539738 0.0120*
SIZE -0.005818 0.002610 -2.229085 0.0272*
AGE 0.001242 0.000316 3.927507 0.0001*
ROA -3.23E-05 0.000456 -0.070859 0.9436
Adjusted R-squared 0.056988
F-statistic 2.682021
Prob(F-statistic) 0.016537*
N (Observations) 170 170 170 170
Description :* indicates a significance of 5%; RPT = Accounts payable, receivables, sales and purchases related party
transactions; POL = political connections to company directors or commissioners; FAMILY = Percentage of family share
ownership; KAP = Audit quality; SIZE = Company size; AGE = Age of the company; ROA = company profitability level.

 The influence of political connections on the RPT The results of this study are consistent with research conducted
The test results in table 3 show that political connections by Azim et al (2018), Amzaleg & Barak (2011), Mohammed
have a positive effect on RPT with a value of 0.0118, which (2019), Cheyoong et al (2015), Kohlbeck et al (2018), Munir
means that it has a significant effect on RPT. The research (2011), Berto (2019) ), Abdullatif et al (2019), Ernawati &
results are consistent with research conducted by Ismail et al Aryani (2019).
(2022), Supatmi et al (2021), Habib et al (2017) and Rahman
& Nugrahanti (2021) Family ownership has proven to be more encouraging for
the magnitude of related party transactions. Family ownership
Ismail et al (2022) stated that many Egyptian companies of the controlling shareholder has proven to strengthen
are still connected to political boards of directors and political motivation to engage in related party transactions. This is very
relations have a significant effect on RPT. Supatmi et al (2021) reasonable because if there are several companies (company
state that political connections strengthen the RPT effect on groups) in the hands of one family controller, the family's
company value. Habib et al. (2017) and Rahman & Nugrahanti wealth is spread over many companies. These conditions will
(2021) state that there is a political connection can be used to allow for expropriation through related party transactions
practice RPT through related party transactions committed by (Dyanty et al, 2012). Family controlled companies have low
the majority shareholder against the minority shareholder . motivation to disclose related party transactions. This result
can be an indication that the family as the controlling
 The effect of family ownership on RPT shareholder takes advantage of related party transactions
Table 3 shows the results statistical test that the value of (Ernawati & Aryani, 2019)
family ownership is 0.0329 which means family ownership
has a significant positive effect on related party transactions.

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 Effect of Public Accounting Firm, Size, Company age and [3]. Alhadab, M., Abdullatif, M., & Mansour, I. (2020).
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