Chaney, Paul and Faccio, Mara and Parsley, David (2009): The Quality of Accounting Information in Politically Connected Firms.
Download (244Kb) | Preview
We document that the quality of earnings reported by politically connected firms is significantly poorer than that of similar non-connected companies. Moreover, we find that earnings quality has no predictive power for the likelihood of establishing connections. Hence, we rule out that our results (on average) are simply due to firms with ex-ante poor earnings quality establishing connections more often. Instead, our results suggest that, because of a lesser need to respond to market pressures to increase the quality of information, connected companies can afford disclosing lower quality accounting information. In particular, lower quality reported earnings is associated with a higher cost of debt only for the non-politically connected firms in the sample.
|Item Type:||MPRA Paper|
|Original Title:||The Quality of Accounting Information in Politically Connected Firms|
|Keywords:||political Ties; information quality|
|Subjects:||G - Financial Economics > G1 - General Financial Markets
G - Financial Economics > G3 - Corporate Finance and Governance
|Depositing User:||David C. Parsley|
|Date Deposited:||07. Mar 2010 01:17|
|Last Modified:||12. Feb 2013 11:23|
Agrawal, Anup, and Charles R. Knoeber, 2001, “Do some outside directors play a political role?” Journal of Law and Economics, 44: 179-198.
Ashbaugh, Hollis, Ryan LaFond, and Brian Mayhew, 2003, “Do nonaudit services compromise auditor independence? Further evidence,” The Accounting Review, 78: 611-639.
Backman, Michael, 1999, “Asian eclipse: Exposing the dark side of business in Asia,” Wiley: Singapore.
Bertrand, Marianne, Francis Kramarz, Antoinette Schoar, and David Thesmar, 2004, “Politically connected CEOs and corporate outcomes: Evidence from France,” working paper, University of Chicago.
Chan, Konan, Louis K. C. Chan, Narasimhan Jegadeesh, and Josef Lakonishok, 2006 “Earnings quality and stock returns,” Journal of Business, 79: 1041-1082.
Claessens, Stijn, Simeon Djankov, and Larry H. P. Lang, 2000, “The separation of ownership and control in East Asian corporations,” Journal of Financial Economics, 58: 81-112.
Cull, Robert, and Lixin Colin Xu, 2005, “Institutions, ownership and finance: The determinants of profit reinvestment among Chinese firms,” Journal of Financial Economics, 77: 117-146.
Dechow, Patricia M. and Ilia D. Dichev, 2002, “The quality of accruals and earnings: The role of accrual estimation errors,” The Accounting Review, 77: 35-59.
Dechow, Patricia M., 1994, “Accounting earnings and cash flows as measures of firm performance: the role of accruals,” Journal of Accounting and Economics, 18: 3-42.
Dechow, Patricia M., Richard G. Sloan, and A. P. Sweeney, 1995, “Detecting earnings management,” The Accounting Review, 70: 193-225
Dechow, Patricia M., S. P. Kothari, and R. L. Watts, 1998, “The relation between earnings and cash flows,” Journal of Accounting and Economics, 25: 133-168.
Dechow, Patricia, Richard Sloan and Amy Sweeney, 1996, "Causes and consequences of earnings manipulation: An analysis of firms subject to enforcement actions by the SEC," Contemporary Accounting Research, 13: 1-36.
Dinç, I. Serdar, 2005, “Politicians and banks: political influences on government-owned banks in emerging countries,” Journal of Financial Economics, 77: 453-479.
Djankov, Simeon, Rafael La Porta, Florencio Lopez-de-Silanes, and Andrei Shleifer, 2008, “The law and economics of self-dealing,” Journal of Financial Economics, 88: 430- 465.
Doidge, Craig, G. Andrew Karolyi, and René M. Stulz, 2007, “Why do countries matter so much for corporate governance?” Journal of Financial Economics, 86: 1-39.
Faccio, Mara, 2006, “Politically connected firms,” American Economic Review, 96: 369-386.
Faccio, Mara, and Larry H. P. Lang, 2002, “The ultimate ownership of western European corporations,” Journal of Financial Economics, 65: 365-395.
Faccio, Mara, Ronald W. Masulis, and John J. McConnell, 2006, “Political connections and corporate bailouts,” Journal of Finance, 61: 2597-2635.
Fama E.F. and K. R. French, 1997, “Industry Costs of Equity”, Journal of Financial Economics. 43: 153-193.
Fan, Joseph, and T.J. Wong, 2002, “Corporate ownership structure and the informativeness of accounting earnings in East Asia,” Journal of Accounting and Economics, 33: 401- 425.
Fan, Joseph, and T.J. Wong, 2007, “Politically-connected CEOs, corporate governance and post-IPO performance of China's partially privatized firms,” Journal of Financial Economics, 84: 330-357.
Fisman, Raymond, 2001, “Estimating the value of political connections,” American Economic Review 91, 1095-1102.
Francis, Jennifer, D. Philbrick, and K. Schipper, 1994, “Shareholder litigation and corporate disclosures,” Journal of Accounting Research 32, 137-164.
Francis, Jennifer, Ryan LaFond, Per Olsson, and Katherine Schipper, 2004, “Cost of equity and earnings attributes,” The Accounting Review, 79: 967-1010.
Francis, Jennifer, Ryan LaFond, Per Olsson, and Katherine Schipper, 2005, “The market pricing of accruals quality,” Journal of Accounting and Economics, 39: 295-327.
Gomez, Edmund Terence, and K.S. Jomo, 1997, “Malaysia’s political economy: Politics, patronage and profits,” Cambridge University Press: Cambridge.
Haw, In-Mu, Bingbing Hu, Lee-Seok Hwang, and Woody Wu, 2004. “Ultimate ownership, income management, and legal and extra-legal institutions,” Journal of Accounting Research, 42: 423-462.
Healy, Paul M. and James M. Whalen, 1999, “A review of earnings management literature and its implications for standard setting,” Accounting Horizons, 13: 365-383.
Hellman, Joel S., Geraint Jones, and Daniel Kaufmann, 2003, “Seize the State, seize the day. State capture, corruption, and influence in transition,” Journal of Comparative Economics, 31: 751-773.
Hribar, Paul, and D. Craig Nichols, 2007, “The use of unsigned earnings quality measures in tests of earnings management,” Journal of Accounting Research, 45: 1017-1053.
Johnson, Simon, and Todd Mitton, 2003, “Cronyism and capital controls: Evidence from Malaysia,” Journal of Financial Economics, 67: 351-382.
Jones, Jennifer, 1991, “Earnings management during import relief investigations,” Journal of Accounting Research, 29: 193-228.
Khwaja, Asim Ijaz, and Atif Mian, 2005, “Do lenders favor politically connected firms? Rentseeking in an emerging financial market,” Quarterly Journal of Economics, 120: 1371-1411.
Kothari, S.P., Andrew J. Leone, and Charles E. Wasley, 2005, “Performance matched discretionary accrual measures,” Journal of Accounting and Economics 39, 163-197.
La Porta, Rafael, Florencio Lopez-de-Silanes, and Andrei Shleifer, 1999, “Corporate ownership around the world,” Journal of Finance, 54: 471-518.
La Porta, Rafael, Florencio Lopez-de-Silanes, Andrei Shleifer, and Robert W. Vishny, 1998, “Law and finance,” Journal of Political Economy, 106: 1113-1155.
LaFond, Ryan, Lang, Mark H., and Hollis Ashbaugh-Skaife, 2007 "Earnings smoothing, governance and liquidity: International evidence,” working paper.
Leuz, Christian, 2006, “Cross listing, bonding and firms’ reporting incentives: A discussion of Lang, Ready and Wilson (2006),” Journal of Accounting and Economics, 42: 285-299.
Leuz, Christian, and Felix Oberholzer-Gee, 2006, “Political relationships, global financing, and corporate transparency: Evidence from Indonesia,” Journal of Financial Economics, 81: 411-439.
Leuz, Christian, Dhananjay Nanda, and Peter D. Wysocki, 2003, “Earnings management and investor protection: An international comparison,” Journal of Financial Economics, 69: 505-527.
Liu, Michelle and Peter Wysocki, 2007, “Cross-sectional determinants of information quality proxies and cost of capital measures,” working paper, MIT.
McNichols, Maureen F., 2002, “Discussion of the quality of accruals and earnings: The role of accrual estimation errors,” The Accounting Review, 77: 61-69.
Morck, Randall K., and Bernard Yeung, 2004, “Family control and the rent-seeking society,” Entrepreneurship: Theory and Practice, 28: 391-409.
Morck, Randall K., David A. Stangeland, and Bernard Yeung, 2000, “Inherited wealth, corporate control, and economic growth: The Canadian disease.” In: R. Morck (ed.), “Concentrated corporate ownership”, University of Chicago Press: Chicago.
Moulton, Brent R., 1990, “An illustration of a pitfall in estimating the effects of aggregate variables on micro units,” The Review of Economics and Statistics, 72: 334-338.
Raman, Kartik, Lakshmanan Shivakumar, and Ane Tamayo, 2008, “Targets’ earnings quality and bidders’ takeover decisions,” working paper.
Richardson, Scott, Patricia Dechow, and İrem Tuna, 2003, “Why are earnings kinky?: An examination of the earnings management explanation,” Review of Accounting Studies, 8, 355-384.
Schipper, Katherine, 1989, “Commentary on earnings management,” Accounting Horizons, 3: 91-102.
Shivakumar, Lakshmanan, 2000, “Do firms mislead investors by overstating earnings before seasoned equity offerings,” Journal of Accounting and Economics 29: 339-371.
Sloan, Richard G., 1996, “Do stock prices fully reflect information in accruals and cash flows about future earnings?” The Accounting Review, 71: 289-315.
Svensson, Jakob, 2003, “Who must pay bribes and how much? Evidence from a cross-section of firms,” Quarterly Journal of Economics, 118: 207-230.
Wang, Dechun, 2006. “Founding family ownership and earnings quality,” Journal of Accounting Research, 44: 619-656.