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

17 Pages Posted: 10 Jul 2014

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: July 2014

Abstract

Manuscript Type. Empirical. Research Question/Issue. Focusing on an environment where ownership concentration is prevalent and where the presence of politically connected directors on the board is the natural form of political connection, we analyze the effect of political connections on earnings informativeness. We also examine 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 in order to protect political ties from public scrutiny and prevent the leakage of competitive advantages to competitors. Additionally, we show that the positive effect of divergence between the dominant owner's voting and cash flow rights on earnings informativeness in firms that belong to a pyramid is explained both by an alignment effect, whereby political connections promote transparency, as well as by a stewardship effect, whereby the ultimate owner of the pyramid, acting as a steward, places politicians on the board to increase the firm's reputation and reports earnings in good faith. Practitioner/Policy Implications. The results of our study may be useful to regulators interested in increasing transparency in order to promote a more efficient allocation of resources. In particular, the results suggest that in countries where recent reforms aim to improve investor protection and market confidence, regulators should encourage the disclosure of firm political ties. The results of our study may also be useful to investors, financial analysts and auditors, as they highlight 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, Europe

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: European Evidence (July 2014). Corporate Governance: An International Review, Vol. 22, Issue 4, pp. 330-346, 2014, Available at SSRN: https://ssrn.com/abstract=2464365 or http://dx.doi.org/10.1111/corg.12064

Carolina Bona Sánchez (Contact Author)

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

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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