Family firms, political connection, and managerial short-termism

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Since the last decade, researchers and practitioners have paid more attention in studying the short-term managerial or managerial myopia. Previous research defines short-term managerial as a form of minimizing long-term investment, for example research and development (R&D), to achieve or exceed short-term performance targets. People believe that R&D investment is the key to a company’s competitive advantage. However, there is a very high risk, complexity, and probability to fail. The results are uncertain and can only be felt in the long run. Therefore, the company invests less in R&D and ignores its importance for the future welfare of the company,

Family firms and political connections are found in developing countries which are characterized by high levels of corruption. Indonesia is one of the 100 most corrupt countries in the world. 27 of 116 companies in Indonesia have political connections, 68% of all companies in Indonesia are family-owned companies. Family businesses involve trust which results in a willingness to take risks such as R&D investment. There is far less manager turnover in the family company, which makes managers use resources efficiently and in the best interests of the company. In addition, political connections can bring benefits to companies (resources, protection of property rights, information, and product legitimacy), but they all have costs. The overall result can be a loss, not a benefit.

Some studies showed that family businesses and R&D are negatively related. Family companies are more risk averse, tend to avoid change and maintain current conditions because their decisions are more conservative. In particular, family businesses will minimize costs including R&D investments that contain risks and only long run returns. If the R&D fails, it can damage the reputation of the company and the families involved in it. R & D will cause a reduction in cash flow at the beginning, and the results will be felt in the long run whether benefits or losses. Therefore, family management can also be skeptical and reluctant to take risks in deciding on R&D investments.

Through political connections, companies can get the latest and reliable information about government policies and economic direction. In addition, political connections can provide easier access to government resources or privileges such as policy-related loans, government subsidies, and tax cuts. Thus, political connections are very important for business development. Politically connected companies have more advantages and privileges compared to those that are not politically related in the form of more interest in financing, work positions and property rights, and support from the government such as tax cuts and subsidies.

According to Miller and Le Breton-Miller, family companies tend to invest their time and money in maintaining relationships with those who can provide resources or benefits such as suppliers, customers, loan or capital providers, and politicians. Political connections can reduce the pressure and motivation of companies for innovation. There is a belief that governments, especially in developing countries, are not good and are not interested in R&D. On the other hand, political connections may require rent-seeking fees to obtain or maintain. These costs can reduce allocations for R&D investment. It shows that politically connected companies tend to have lower R&D investment.

Harymawan, Rizki, Nasih and Dewi conducted a research in 2019 entitled Family firms, political connections, and managerial short-termism by involving 959 samples of companies listed on the Indonesia Stock Exchange (IDX) in the 2014-2016 period. This study used secondary data obtained from ORBIS, ICMD (Indonesian Capital Market Directory), and BEI Annual Report.

The results of the analysis have revealed evidence that companies with lower family ownership tend to be more involved in the managerial short termism. With increasing family ownership, family companies are better off safeguarding their welfare in the future and free of managerial short-termism. This study found that political connections moderate family businesses into managerial short-termism regardless of the level of family ownership. This finding implies that the level of family ownership affects company decisions in research and development (R & D) and political connections are able to make family businesses more managerial short termism.

Author: Iman Harymawan, Ph.D. Details of this research available at at: http://jssidoi.org/jssi/uploads/papers/35/Harymawan_Family_firms_political_connections_and_managerial_shorttermism.pdf

Harymawan, I., Rizki, A., Nasih, M., & Dewi, A. K. (2020). Family firms, political connections, and managerial short-termism. Journal of Security and Sustainability Issues. https://doi.org/10.9770/jssi.2020.9.J(14)

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