Political Connections as a Moderator in the Profitability, Leverage and Financial Distress Relationship: Evidence from the Jakarta Islamic Index

This study investigates the moderating role of political connections in the relationship between profitability, leverage, and financial distress among companies listed on the Jakarta Islamic Index (JII) from 2019 to 2023. Grounded in Agency Theory and Signaling Theory, the research explores whether political affiliations alter the financial risk profile of firms. A quantitative approach is used, with 74 firm-year observations analyzed through Structural Equation Modeling using Partial Least Squares (SEM-PLS). Financial distress is measured using the Altman Z″-score, while profitability (ROA), leverage (DAR), and political connection (dummy variable) serve as the main predictors. The findings reveal that profitability does not significantly affect financial distress, whereas leverage shows a strong positive effect. Political connections also increase the likelihood of financial distress and significantly strengthen the relationship between leverage and financial distress, though they do not moderate the profitability–distress link. The results contribute to the literature by illustrating how political ties can amplify financial risk, supporting the theoretical insights of Agency Theory and Signaling Theory. These insights are particularly relevant for stakeholders in emerging markets seeking to manage governance and financial vulnerabilities.