Since 1996, public companies in Indonesia are required to submit disclosure information to the public by following the rules issued by The Capital Market and Financial Institutions Supervisory Board (Bapepam-LK). However, not a few companies are not enough transparent in providing information.
Publication of The McKinsey Quarterly 2004 reported that enforcement of corporate governance rules of Indonesia ranks the lowest among 10 developing countries in Asia. "In addition, Indonesia has been popular in the development of political connections. Companies in certain ways seek closeness with politicians/government," Lukas Purwoto, S.E, M. Si, lecturer of Faculty of Economics, Sanata Dharma University (USD) Yogyakarta said on Monday (16/5) in an open examination of his doctoral program in Audio Visual Room, Faculty of Economics and Business UGM.
In his dissertation entitled Effect of Political Connections, Government Ownership, and Unclearness of Financial Statements and Stock Prices Crash Risk, Lukas mentioned that political closeness makes it difficult for companies to be open in providing information to outside parties. It directs the stock price less informative. Consequently, political ties would make the company more difficult in realizing the corporate governance mechanism externally and internally based on stock prices.
Lukas added that the company plays a major role towards the realization of good governance through the provision of specific information of company to outside parties. The high transparency and disclosure will reduce information search cost which is useful for foreign investors, security analysts and other participants in the stock market.
The result of Lukas’s research on a number of public companies in Indonesia Stock Exchange between 2004-2008 showed the political connections increase synchronization of stock price. It is similar to majority government’s ownership as well as unclear reports. The clearer the company's financial reports, the positive influence of political connections as well as government ownership of stock price’s synchronization tend to be even greater. "These results imply that the existence of political connections, majority government’s ownership, and presentation of unclear financial statements inhibits the provision of company’s specific information on the stock market so the stock price less reflects the condition and performance of companies," he explained.
According to Lukas, the motive of obfuscation of information by companies has a high political relation or the government becomes more prominent as the financial statements are presented unclearly or not qualified. Other results show the political connections and government ownership do not increase the crash risk of stock price when financial reports are not blurred or qualified.
This would imply that the high quality corporate financial reports can maintain/avoid the adverse effects of stock price crash on political-related and government-owned companies. "However, while the non-transparent financial reports, political connection or government ownership has positive influence on stock prices crash risk," the man born in Klaten, October 6, 1969, explained.