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The Quality of Accounting Information in Politically Connected Firms

Paul K. Chaney
Vanderbilt University - Owen Graduate School of Management

Mara Faccio
Purdue University - Krannert School of Management; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

David C. Parsley
Vanderbilt University - Owen Graduate School of Management


June 18, 2008

AFA 2010 Atlanta Meetings Paper

Abstract:     
Recent studies have documented systematic exchanges of favors between politicians and firms, and that connected firms, on average gain from political ties. The nature of these payments may create incentives to expropriate or at least obscure information from minority shareholders. Moreover, in the case of political ties, the costs of lower quality disclosures may be mitigated. Empirically, we find that the quality of earnings reported by politically connected firms is significantly poorer than that of similar non-connected companies. Additionally, among connected firms, those that have stronger political ties have the poorest accruals quality. This evidence suggests that managers of connected firms appear to be less sensitive to market pressures to increase the quality of information. This choice seems to be justified in that lower quality reported earnings is associated with higher cost of debt only for the non-politically connected firms in the sample.

Keywords: Political connections, information quality, accruals quality

JEL Classifications: F30, G30, G32, G34, M41, M43

Working Paper Series

Date posted: March 01, 2007 ; Last revised: March 17, 2009

Suggested Citation

Chaney, Paul K., Faccio, Mara and Parsley, David C., The Quality of Accounting Information in Politically Connected Firms (June 18, 2008). AFA 2010 Atlanta Meetings Paper. Available at SSRN: http://ssrn.com/abstract=966379


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Contact Information

Mara Faccio (Contact Author)
Purdue University - Krannert School of Management ( email )
1310 Krannert Building
West Lafayette, IN 47907-1310
United States
Centre for Economic Policy Research (CEPR)
90-98 Goswell Road
London EC1V 7RR United Kingdom
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels Belgium
HOME PAGE: http://www.ecgi.org
Paul K. Chaney
Vanderbilt University - Owen Graduate School of Management ( email )
401 21st Avenue South
Nashville, TN 37203
United States
David C. Parsley
Vanderbilt University - Owen Graduate School of Management ( email )
401 21st Avenue South
Nashville, TN 37203
United States
615-322-0649 (Phone)
615-343-7177 (Fax)
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