Review Article

Political connections, investment

opportunity sets, tax avoidance: does
corporate social responsibility
disclosure in Indonesia have a role?
Amrie Firmansyah * , Amardianto Arham, Resi Ariyasa
Qadri, Puji Wibowo, Ferry Irawan, Nur Aisyah Kustiani,
Suparna Wijaya, Arifah Fibri Andriani, Zef Arfiansyah,
Lestari PKurniawati,
R E S E N T E RAzas
N A MMabrur,
E Agung Dinarjito,
RahayuDKusumawati,
AT E Moh. Luthfi Mahrus
 Elvira Sitna Hajar
Mahasiswi Program Doktor Ilmu Manajemen
PDMKJ, Universitas Brawijaya
NIM: 227020400011005
 Introduction
Literatur review
and Theory
Table of
Methodology
Content
Analysis and
Result
Conclusion
 The article investigates the relationship
between corporate social responsibility (CSR)
disclosure, political connections, investment
opportunity sets, and tax avoidance among
publicly listed firms in Indonesia.
Specifically, the article examines whether
firms with political connections are more
likely to engage in tax avoidance and whether
CSR disclosure can act as a mitigating factor
in this relationship. The study also explores
whether investment opportunity sets influence
the relationship between political connections
and tax avoidance.

• The article provides an introduction to the concept of CSR disclosure and its
importance in promoting transparency and accountability in corporate
activities. It also discusses the significance of political connections and
investment opportunity sets in shaping corporate behavior, particularly with
regard to tax avoidance.
• The study is based on a sample of 252 publicly listed firms in Indonesia, and
the data is analyzed using regression analysis. The article concludes with a
discussion of the findings and their implications for policy and practice.
 Literatur Review and Theory
Tax avoidance is part of tax planning. Besides, tax avoidance can include tax aggressiveness; in other
words, tax aggressiveness is one small part of tax avoidance (Lietz (2013)
tax avoidance could include tax savings (tax sheltering). Thus, tax aggressiveness and sheltering can be
equated to or referred to as tax avoidance measures. (Kovermann & Velte (2019)
Tax avoidance is an exciting issue not only in the political and academic debate (Huseynov et al., 2017),

The general public has also paid more attention in response to media reports about tax avoidance practices by some global
companies (Kanagaretnam et al., 2016),

Some of these cases have given the impression that tax avoidance is a common phenomenon in today's business world
((Sudiarta, 2016).

Indonesia, as a middle-income country, ranks 11 out of 30 countries in terms of levels of tax avoidance as published in the
databases of the International Center for Policy and Research (ICPR) and the International Center for Taxation and
Development (ICTD) with the amount of tax not paid to the country being estimated at the US $ 6.48 billion per year (Cobham
and Janský, 20
Literatur Review and Theory
 studies on the factors that influence tax avoidance activities carried out by companies in Indonesia
has also been widely carried out,( Arham et al. (2020) and Herawati et al. (2019)
 These studies include reviewing company size (Fitria and Handayani, 2019), institutional
ownership (Sari and Devi, 2018), leverage (Hidayat, 2018), corporate governance (Gunawan,
2017), executive characteristics (Carolina et al., 2014), managerial skills (Nurfauzi and
Firmansyah, 2018), multinational (Damayanti and Prastiwi, 2017), profitability (Saputra et al.,
2015), sales growth (Turyatini, 2017), liquidity (Tiaras and Wijaya, 2015), the political
connections owned by the company (Ferdiawan and Firmansyah, 2017; Iswari et al., 2019; Lestari
et al., 2019; Purwanti and Sugiyarti, 2017; Sudibyo and Jianfu, 2016; Wicaksono, 2017), sets of
investment opportunities they have as companies (Firmansyah and Bayuaji, 2019; Handayani,
2013; Lubis et al., 2015), as well as disclosure of corporate social responsibility (Adiputra et al.,
2019; Dharma and Noviari, 2017; Fitri and Munandar, 2018; Khairunisa et al., 2017; Mulyani et
al., 2017; Wijayanti et al., 2016).
 Literatur Review and Theory
 Positive Accounting Theory: political connections and investment opportunity sets can be linked in
the formulation of company policies that tend to have a motive to reduce the number of reported
earnings to avoid taxes (Godfrey et al., 2010; Scott, 2015; Watts and Zimmerman, 1990). Positive
accounting theory can also explain companies' investment policy choices, as seen in investment
opportunity sets. Besides, political connections are often associated with an investment; as stated
by Fisman (2001), political connections are a determinant of profitability that can cause distortions
in investment decisions or policies.
 The resource dependence theory:The theoretical background for the relationship between political
connections and firm performance
 The theory of legitimacy can be used to explain the relationship between sustainability disclosure
and firm performance. According to this theory, companies need to maintain their legitimacy with
stakeholders by engaging in socially responsible behavior
Methodology
This study used a
quantitative method with
two-panel data regression
models, namely the model
and without moderation.
This study analyzed 42
manufacturing companies
listed on the Indonesia Stock
Exchange from 2014 to
2019, selected through a
purposive sampling method
to produce 252 observations.
 Methodologi
• . The population used in this study were all companies listed on the Indonesia Stock Exchange as of
June 30, 2020. This study selected a sample using the purposive sampling method with the
following criteria: From Table 1, manufacturing companies with a negative amount of pre-tax
income or experiencing losses were excluded from this study because it can cause misleading in
calculating the tax expenses, resulting in distortion of the measurement of the tax avoidance
variable (Hanlon and Heitzman, 2010).
• Dependent variable was tax avoidance, the independent variable was political connections and
investment opportunity sets. This study used corporate social responsibility disclosure as a
moderating variable and company size, leverage, and profitability as control variables
• To overcome various limitations in tax avoidance measurement, the proxy used in this study was
abnormal permanent differences originating from manager discretion (DTAX). According to Frank
et al. (2009), using DTAX proxies in measuring the level of tax avoidance can better detect any
efforts to reduce taxable profits aimed at tax avoidance.
Methodologi
Methodologi
 Methodologi

The DTAX value in this study was obtained from the regression results in a cross-sectional manner.
Cross-sectional regression was chosen because it can capture differences in tax avoidance from year
to year due to changes in industrial conditions and economic policies in the year concerned (Saksessia
and Firmansyah, 2020). This study refers to political connections in Adhikari et al. (2006), Faccio
(2010), Iswari et al. (2019), and Sudibyo and Jianfu (2016), which stated that a company has political
connections if the shareholder who owns at least 10% of the total shares or one of the company's
directors/commissioners is:
• 1) members or former members of parliament,
• 2) minister/cabinet member or former minister/cabinet member,
• 3) members or former members of a political party, or
• 4) officials or former officials of central/regional government, which includes the military forces.
POLCONit ¼ LN ð1 þ Politically Connected Board MemberÞ (2)
In this study, investment opportunity is the company's tangible assets or resources and the company's
ability to continue to grow by investing in various profitable investment options for the company
(Kallapur and Trombley, 2001; Myers, 1977).
 Analysis

 There were more potential impact of corporate social responsibility (CSR) disclosure on the
relationship between political connections, investment opportunity sets, tax avoidance, and firm
performance in Indonesia. CSR disclosure is the voluntary reporting of a firm's social and
environmental performance to stakeholders. This analysis aims to explore whether CSR disclosure
can mitigate the negative effects of political connections, investment opportunity sets, and tax
avoidance on firm performance.
 Political connections refer to the relationships that firms have with government officials or
political parties. In Indonesia, political connections can have a significant impact on a firm's access
to resources, such as government contracts or permits. Investment opportunity sets refer to the
opportunities available to firms to invest in profitable projects. Tax avoidance refers to a firm's
efforts to reduce its tax liabilities through legal means.
 Analysis
• Research has shown that political connections can increase a firm's access to resources, but can also lead to rent-
seeking behavior and inefficiencies. Investment opportunity sets can lead to increased profitability, but can also
lead to increased risk-taking behavior. Tax avoidance can reduce a firm's tax liabilities, but can also lead to
reputational damage and legal penalties.
• CSR disclosure is becoming increasingly important for firms, as stakeholders are becoming more interested in a
firm's social and environmental performance. CSR disclosure can improve a firm's reputation, reduce regulatory
risks, and increase stakeholder engagement. In Indonesia, the government has mandated that firms disclose their
CSR activities in their annual reports.
• Research has shown that CSR disclosure can mitigate the negative effects of political connections, investment
opportunity sets, and tax avoidance on firm performance. CSR disclosure can increase a firm's legitimacy, reduce
the perceived risks associated with political connections and tax avoidance, and increase stakeholder engagement.
• In Indonesia, CSR disclosure can improve a firm's reputation and reduce the perceived risks associated with
political connections and tax avoidance. Additionally, CSR disclosure can increase stakeholder engagement and
help firms identify new investment opportunities.
 Analysis
• One of the strengths of the article is its focus on an emerging market
context, specifically Indonesia. The authors highlight the unique challenges
and opportunities facing firms in this context and provide insights into how
political connections, investment opportunity sets, and CSR disclosure
may affect firm behavior and performance.
• However, one limitation of the article is its narrow focus on tax avoidance
as the main outcome variable. While tax avoidance is an important issue
for firms, other measures of firm performance could have been included,
such as financial performance or social and environmental performance.
 Conclusion
CSR disclosure can play a role in reducing tax
avoidance in Indonesia, but its effectiveness may
depend on the firm's political connections and
investment opportunity sets. The study highlights
the importance of considering these contextual
factors when designing and implementing CSR
policies and regulations.
Thank You