The Role of Political Connections and Management Risk Appetite on Financial Distress in the Indonesian Banking Sector
Main Article Content
Abstract
In heavily regulated banking sectors, understanding how managerial risk preferences and political linkages influence systemic financial stability is paramount. This study examines the effects of management risk appetite and political connections on financial distress, and tests political connections as a moderating variable among publicly listed banks in Indonesia during 2019–2024, controlling for bank age, board size, institutional ownership, and net interest margin. Using purposive sampling, 42 banks were selected, yielding 252 firm-year observations analyzed via panel data regression using a Random Effects Model. The results reveal that management risk appetite has no significant direct effect on financial distress, suggesting that strict regulatory oversight tempers internal risk preferences. In contrast, political connections significantly exacerbate financial distress, undermining overall bank health. Political connections do not significantly moderate the impact of management risk appetite on financial distress. Among the control variables, net interest margin significantly improves financial stability. This study contributes to the corporate governance literature by providing empirical evidence from an emerging market on the destabilizing role of political ties in banking distress. The findings offer practical insights for regulators and bank boards to strengthen oversight on political connections. However, the model exhibits limited explanatory power. Future research should incorporate broader governance mechanisms and specific political tie dimensions to extend these findings.
Article Details
This work is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
References
Abid, A., Ali, A., Hussain, N., & Khuong, D. (2021). Risk governance and bank risk-taking behavior: Evidence from Asian banks. Journal of International Financial Markets, Institutions & Money, 75, 101466. https://doi.org/10.1016/j.intfin.2021.101466
Agelita, M., Rahman, S., & Kurniawan, M. (2025). The influence of CAMEL and CSR on financial sustainability in banking companies listed on the Indonesia Stock Exchange for the period 2017–2022. International Journal of Economics Development Research, 6(1), 322–340.
Alzayed, N., Eskandari, R., & Yazdifar, H. (2023). Bank failure prediction: Corporate governance and financial indicators. Review of Quantitative Finance and Accounting, 61(2). https://doi.org/10.1007/s11156-023-01158-z
Arsana, I. N. (2025). Financial distress prediction in rural banks in Indonesia: Pressure ratio, intermediation, and efficiency. Jurnal Ilmiah Akuntansi Kesatuan, 13(3), 591–602. https://doi.org/10.37641/jiakes.v13i3.3491
Azizah, S., & Lismawati. (2020). The effect of financial performance on financial distress. 167–178. https://doi.org/10.37641/jiakes.v12i1.2470
Bellardini, L., Murro, P., & Previtali, D. (2024). Measuring the risk appetite of bank-controlling shareholders: The Risk-Weighted Ownership Index. Global Finance Journal, 60, 100935. https://doi.org/10.1016/j.gfj.2024.100935
Boateng, A., Liu, Y., & Brahma, S. (2018). Politically connected boards, ownership structure and credit risk: Evidence from Chinese commercial banks. Research in International Business and Finance. https://doi.org/10.1016/j.ribaf.2018.07.008
Braham, R., de Peretti, C., & Belkacem, L. (2020). The role of political patronage in the risk-taking behaviour of banks in the Middle East and North Africa. Research in International Business and Finance, 53, 101184. https://doi.org/10.1016/j.ribaf.2020.101184
Cameron, A. C., & Trivedi, P. K. (2022). Microeconometrics using Stata: Volume II. Nonlinear models and causal inference methods (2nd ed.).
Candra, A. R., & Joni, J. (2025). Politically connected independent supervisory board and financial distress during the COVID-19 pandemic. Journal of Accounting in Emerging Economies. https://doi.org/10.1108/JAEE-08-2024-0336
Cegłowski, B., Jackowicz, K., Kozłowski, Ł., & Kuchciak, I. (2025). Banks, freedom, and political connections: New evidence from around the world. Journal of Financial Stability, 76, 101353. https://doi.org/10.1016/j.jfs.2024.101353
Chen, H. (2018). The effect of the political connections of government bank CEOs on bank performance during the financial crisis. Journal of Financial Stability. https://doi.org/10.1016/j.jfs.2018.02.010
Citterio, A. (2024). Bank failure prediction models: Review and outlook. Socio-Economic Planning Sciences, 92, 101818. https://doi.org/10.1016/j.seps.2024.101818
Coupet, J., & McWilliams, A. (2017). Integrating organizational economics and resource dependence theory to explain the persistence of quasi markets. Administrative Sciences, 7(3), 29. https://doi.org/10.3390/admsci7030029
Darrat, A. F., Gray, S., & Park, J. C. (2014). Corporate governance and bankruptcy risk. Journal of Accounting, Auditing & Finance, 1–40. https://doi.org/10.1177/0148558X14560898
Elyasiani, E., & Jia, J. (2025). Institutional ownership and bank failure. Journal of Financial Stability, 76, 101366. https://doi.org/10.1016/j.jfs.2024.101366
Erdi, T. W., Agustin, W., Pradana, S. A. G., & Theresia, T. (2022). CAMEL ratio as an indicator of financial distress Altman Z-score model with company size as a moderating variable. Journal of Applied Sciences in Accounting, Finance, and Tax, 5(2), 95–104.
Ferdiansyah, F., & Widyarti, E. T. (2022). Analysis of CAMEL ratio on financial distress banking companies in Indonesia. Diponegoro International Journal of Business, 5(1), 47–56.
Gerged, A. M., Yao, S., & Albitar, K. (2022). Board composition, ownership structure and financial distress: Insights from UK FTSE 350. Corporate Governance, 23(3), 628–649. https://doi.org/10.1108/CG-02-2022-0069
Hadiputra, A. A., & Windijarto. (2023). Political connection, financial distress and cost of debt: Empirical evidence from emerging country. Journal of Theoretical and Applied Management, 16(2).
Handi, H., & Rulindo, R. (2025). Management risk appetite as a determinant of bank value and performance: Theoretical perspective and empirical evidence from Indonesia. Eduvest – Journal of Universal Studies, 5(9), 10826–10837.
Harianto, S., Guney, Y., Khalil, M., & Andrikopoulos, P. (2025). Political connections and investment inefficiency: A machine learning approach. The European Journal of Finance. https://doi.org/10.1080/1351847X.2025.2513505
Jin, Y. (2024). Management risk appetite, internal control and corporate financialization. Finance Research Letters, 63, 105393. https://doi.org/10.1016/j.frl.2024.105393
Kalbuana, N., Taqi, M., Uzliawati, L., & Ramdhani, D. (2022). The effect of profitability, board size, woman on boards, and political connection on financial distress conditions. https://doi.org/10.1080/23311975.2022.2142997
Kolondam, C. Y., & Permatasari, I. K. (2024). The effect of transfer pricing and political connections on tax avoidance with [title incomplete]. Eduvest – Journal of Universal Studies, 4(8), 7457–7474.
Kusnadi, Y. (2024). Politically connected firms and the cash flow sensitivity of cash: International evidence. Finance Research Letters, 69, 106193. https://doi.org/10.1016/j.frl.2024.106193
Kusnaedy, N. P., Setiawan, Qolbi, S. K., & Abdusyakur, M. Z. (2025). The influence of bank specific factors on financial stability in Sharia commercial banks in Indonesia from 2013 to 2023. Indonesian Journal of Economics and Management, 5(2), 250–271. https://doi.org/10.35313/ijem.v5i2.6626
Li, Z., Ying, Q., Chen, Y., & Zhang, X. (2020). Managerial risk appetite and asymmetry cost behavior: Evidence from China. Accounting & Finance. https://doi.org/10.1111/acfi.12692
Nguyen, H. V., Phan, T. T., & Lobo, A. (2019). Debunking the myth of foreign direct investment toward long-term sustainability of a developing country: A transaction cost analysis approach. Sustainability, 11(17).
Nuswantara, D. A., Prameswari, R. D., Rusdiyanto, R., & Hendrati, I. M. (2023). The role of political connection to moderate board size, woman on boards on financial distress. Cogent Business & Management, 10(1). https://doi.org/10.1080/23311975.2022.2156704
Papadimitri, P., Pasiouras, F., Pescetto, G., & Wohlschlegel, A. (2021). Does political influence distort banking regulation? Evidence from the [title incomplete]. Journal of Financial Stability, 53, 100835. https://doi.org/10.1016/j.jfs.2020.100835
Pepper, A., & Gore, J. (2013). Behavioral agency theory: New foundations for theorizing about executive compensation. Journal of Management. https://doi.org/10.1177/0149206312461054
Pfeffer, J., & Salancik, G. R. (1978). The external control of organizations: A resource dependence perspective. Stanford University Press.
Prihatiningtias, Y. W., & Adiwicaksana, S. (2024). The role of political connection in moderating the effect of board diversity on financial distress. Journal of Applied Finance & Accounting, 11, 83–93.
Saputra, A., & Rahman, A. (2023). ESG performance and its impact on mitigating cost of capital: Evidence from Southeast Asia. E-Jurnal Akuntansi, 34(8), 2054–2072. https://doi.org/10.24843/EJA.2024.v34.i08.p12
Setiadi, F., & Aryani, Y. A. (2019). Political connection and credit risk management: Its effect on bank’s performance. Jurnal Riset Akuntansi dan Keuangan Indonesia, 4(3), 112–121.
Taufik, M., & Chua, L. (2016). BOD characteristics and firm performances: Evidence from Indonesia. Sebelas Maret Business Review, 6(2), 99–110.
Tian, J., & Hassan, K. (2024). Do politically connected banks perform better in a democratic environment? 3(2), 239–260.
Tzeng, G.-H., & Huang, J.-J. (2011). Multiple attribute decision making: Methods and applications. Taylor & Francis Group.
Zhang, Y., Luan, H., Shao, W., & Xu, Y. (2016). Managerial risk preference and its influencing factors: Analysis of large state-owned enterprises management personnel in China. Risk Management. https://doi.org/10.1057/s41283-016-0001-9