Government Connection Versus Financial Reporting Quality: The Effect on Investment Decision

Abstract

This paper aims to examine the impact of government connection in using financial information on investment decisions, and investment decision making companies are more likely to be influenced by financial reporting quality or government connections. This study used quantitative research with a sample of infrastructure industry companies, both government and non-government companies, totaling 460 consisting of 248 non-government companies and 218 government companies. This research was conducted from 2014 to 2018 because, in that period it was supported by government policies in carrying out infrastructure development throughout Indonesia. This study showed that the higher the Financial Reporting Quality (FRQ), the more  efficient the investment made by the company. In addition, it showed that government connection does not affect investment decisions. The results of this study support the agency theory which indicates that there is a need for agency costs incurred by companies in decision making. Implication for the Indonesian Stock Exchange (IDX) and the Financial Services Authority (FSA) is to monitor its companies so that they can publish good quality of financial report, and eventually investments made by companies can be more efficient. This study examines the role of CEOs of government companies in investment decision.