Politically Connected Firms and Earnings Informativeness in the Controlling Versus Minority Shareholders Context

36 Pages Posted: 27 May 2013

See all articles by Carolina Bona‐Sánchez

Carolina Bona‐Sánchez

University of Las Palmas de Gran Canaria

Jerónimo Pérez Alemán

Universidad de Las Palmas de Gran Canaria

Domingo J. J. Santana‐Martín

University of Las Palmas de Gran Canaria

Date Written: May 25, 2013

Abstract

Research Question/Issue: Focusing on an environment where the principal agency conflict steams from the divergence of interests between dominant owners and minority shareholders, and where the legal system provides weak protection to external investors, we analyze the effect of firms’ political ties on earnings informativeness. We also address a question that has not been considered in previous research, namely, the impact of the level of divergence between the dominant owner’s voting and cash flow rights on earnings informativeness for politically connected firms.

Research Findings/Insights: We find that the presence of politicians on the board negatively affects earnings informativeness. We also find a positive impact of the divergence between the dominant owner’s voting and cash flow rights on the informativeness of accounting earnings in politically connected firms.

Theoretical/Academic Implications: We show that the relationship between political ties and earnings informativeness is explained by an information effect, whereby politicians and shareholders are interested in providing as little information to the market as possible. Additionally, we show that the positive relationship between divergence and earnings informativeness in politically connected firms is explained by an alignment effect, whereby the existence of political ties reduces the dominant owner’s incentive to expropriate minority shareholders’ wealth, thus increasing earnings informativeness.

Practitioner/Policy Implications: The results of our study may be useful for regulators interested in increasing transparency in order to promote a more efficient allocation of resources. Similarly, the results may be useful to investors, financial analysts and auditors, as they provide evidence of the importance of considering specific features of the corporate governance system when assessing the credibility of accounting information.

Keywords: Corporate governance, Earnings informativeness, Politically connected firms

JEL Classification: G30, M41

Suggested Citation

Bona Sánchez, Carolina and Perez Aleman, Jeronimo and Santana-Martín, Domingo J., Politically Connected Firms and Earnings Informativeness in the Controlling Versus Minority Shareholders Context (May 25, 2013). Available at SSRN: https://ssrn.com/abstract=2270087 or http://dx.doi.org/10.2139/ssrn.2270087

Carolina Bona Sánchez

University of Las Palmas de Gran Canaria ( email )

C/Juan de Quesada, No. 30
Las Palmas de Gran Canaria, Las Palmas 35017
Spain

Jeronimo Perez Aleman (Contact Author)

Universidad de Las Palmas de Gran Canaria ( email )

C/Juan de Quesada, No. 30
Las Palmas de Gran Canaria, Las Palmas 35017
Spain

Domingo J. Santana-Martín

University of Las Palmas de Gran Canaria ( email )

C/Juan de Quesada, No. 30
Las Palmas de Gran Canaria, Las Palmas 35017
Spain

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