Estimating the value of political connections in a Sharia-compliant environment : evidence from Indonesia

シャリア・コンプライアンス環境下における政治的つながりの価値推定： インドネシアにおける実証分析

Estimating the value of political connections in a Sharia-compliant environment : evidence from Indonesia

Degree Grantors Yamaguchi University

Political connections are considered a valuable resource in not only high-corruption countries but also low-corruption countries. This dissertation investigates the relationship between political connections and Sharia compliance, aiming to deepen understanding of the nature of political connections, as Sharia compliance prohibits engaging in corruption. Specifically, I analyze whether: 1) political connections and Sharia compliance affect merger and acquisition (M&A) performance; 2) connections to politicians affect the market response to firms' inclusion in or exclusion from the Indonesia Sharia Stock Index (ISSI); 3) political connections and Sharia compliance have been valuable during the COVID-19 pandemic; and 4) political connections affect firms' environmental performance.
This dissertation comprises six chapters. Chapters 1 and 6 respectively introduce and conclude this dissertation. The remaining four chapters (i.e., Chapters 2-5) are essays on the empirical relationship between political connections and Sharia compliance. In Chapter 2, I study the impact of political connections and Sharia compliance on M&A performance, focusing on M&A deals in Indonesia during 2010-2016. I find that while political connections can improve market reactions to M&A announcements, Sharia compliance has a positive but insignificant impact on M&A performance. I further find that there is a substitution relationship between Sharia compliance and political connections: Sharia -compliant firms with political connections have poorer M&A performance than non-Sharia-compliant firms with political connections.
Chapter 3 examines market responses to firms' addition to and removal from the ISSI and how political connections influence those market responses. I employ two kinds of analysis. First, using the event-study methodology, I measure abnormal returns surrounding the announcement of each firm's addition to or removal from the ISSI. Second, to more precisely identify the relationship between political connections and Sharia compliance, I use a pooled regression analysis. The results show that neither addition to nor removal from the ISSI produces abnormal returns for Indonesian firms, indicating that investors are little concerned with ISSI reconstitutions. Furthermore, political connections increase firms' value before inclusion in the ISSI, but the benefits of these connections are lost after their addition to the index.
Chapter 4 offers novel evidence by investigating the value of political connections and Sharia compliance during the COVID-19 pandemic. I use the event-study methodology to measure the stock market reaction to the COVID-19 pandemic, and conduct a pooled regression analysis to more precisely identify the value of political connections and Sharia compliance during the pandemic. I find that a stock market anomaly occurred during the COVID-19 pandemic in Indonesia, in that the pandemic had a positive impact on the stock market. I also find that there was value for firms in being Sharia-compliant during the pandemic when the government announced tax incentives for firms.
In Chapter 5, I investigate the relationship between political connections and the environmental performance of Sharia -compliant firms. I use a unique sample of firms covered by Indonesia's Program for Pollution Control Evaluation and Rating during 2013-2019. I find that political connections are less (more) valuable for Sharia-compliant firms (non-Sharia-compliant firms) m enhancing their environmental performance.

Creators Wahyono Budi