The Quality of Accounting Information in Politically Connected Firms

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