How Economically Dominant Minority Businesses Manage Business Risks: Evidence from a Natural Experiment in Indonesia
The purpose of this thesis is to provide a comprehensive examination of the reactive and proactive legitimacy strategies of Economically Dominant Minorities (EDM) in corporations. It takes two different angles, corporate information disclosure and financial statement numbers. EDM refers to minority ethnic groups that dominate and control an economic sector despite being demographically outnumbered. Even though EDM play a critical role in developing countries, their economic dominance has resulted there in prolonged income inequality. Small numbers of ethnic minorities (the ethnic Chinese in Southeast Asia, the ethnic Indian in Fiji, the Lebanese in Ivory Coast, the Whites in South Africa) enjoy overwhelming prosperity while the majority indigenous live in poverty. This income inequality has catalysed discontent and resentment against EDM. Furthermore, organisational features may influence the ability of EDM ability to defuse the institutional pressure. Therefore, this study broadens the discussion by considering the roles of organisational features, namely international orientation and political connection as risk reduction strategies. Looking at responses to the 2015 forest fires in Indonesia that aggravated popular discontent against the ethnic Chinese, this study investigates how Ethnic Chinese Businesses (ECB), a typical EDM in Indonesia, alleviated institutional pressure and managed legitimacy. The reactive and proactive legitimacy strategies taken by ECB are examined in three papers. The first paper (in Chapter 3) empirically examines whether environmental information disclosure was adopted by ECB as a reactive legitimacy strategy after the environmental crisis. This study goes on to examine the contingent effects of international orientation and political connection. The results find that, compared to non-ECB, ECB showed a greater improvement in their environmental disclosure level after the crisis. However, internationally oriented ECB and politically connected ECB did not increase their environmental disclosure level following that crisis. This finding suggests that internationally oriented and politically connected ECB have a remarkable ability to defuse institutional pressure, and can afford to disclose less environmental information after an environmental crisis. The second paper of this thesis (in Chapter 4) examines whether ECB react to intense institutional pressure by using both downward earnings management and environmental disclosure and whether the relationship between the downward earnings management and environmental disclosure level improvement is complementary or substitutive. In further analysis, I examine the role of political connection in this relationship. The result finds a complementary relationship between downward earnings management and environmental disclosure. This finding suggests that increased ethnic tension has forced legitimacy-seeking ECB to sacrifice financial report quality by manipulating earnings downward while at the same time disclosing more environmental disclosure to change negative social perception and camouflage their earnings manipulation practices. In further analysis, I find that the complementary relationship is stronger for non-politically connected ECB, suggesting the essential value of political connection to enhance the ability of ECB to alleviate institutional pressure. Lastly, the third paper (in Chapter 5) examines the effect of ethnic tension and proactive risk management on the ECB cost of capital after the environmental crisis. This study reveals that ethnic tension adds a severe cost of capital increase after the crisis. Furthermore, the increase in cost of capital is less pronounced in the case of ECB that are more environmentally friendly, have lower risk exposure and are less politically vulnerable. The findings suggest that the extent to which EDM suffer from ethnic tension could depend on how EDM proactively use environmental disclosure to manage legitimacy and implement risk reduction strategies prior to a crisis. This study contributes to the literature on EDM in several ways. First, it extends that literature by providing a comprehensive examination of reactive and proactive legitimacy strategies adopted by EDM to address institutional pressure and maintain legitimacy. Second, this study demonstrates that the relationship between earnings management and corporate environmental disclosure is complementary within a specific context, that is, under strong ethnic tension. Third, to my knowledge, this is the first study to build a linkage between ethnic tension and cost of capital. Finally, this thesis contributes to the organisational legitimacy literature by examining the role of organisational features in helping EDM to defuse institutional pressure.