Political Corruption and Accounting Choices

51 Pages Posted: 17 Apr 2019

See all articles by Huai Zhang

Huai Zhang

Nanyang Technological University (NTU)

Jin Zhang

Monash University

Date Written: March 30, 2019

Abstract

We examine how political corruption affects firms’ accounting choices. We hypothesize and find that firms headquartered in corrupt districts manipulate earnings downwards, relative to firms headquartered elsewhere. Our finding is robust to alternative corruption measures, restatement-based earnings management measures, and the instrumental variable approach. Consistent with the motive to depress earnings, we find that firms headquartered in corrupt districts prefer LIFO over FIFO, and the accelerated depreciation method over the straight-line method, they report high LIFO reserve and depreciation reserve, and they tend to select a low useful life estimate. Finally, we find that the effect of corruption on earnings management is more pronounced for geographically concentrated firms and for firms without political connections. In sum, our findings suggest that firms respond to corruption by lowering their accounting earnings.

Keywords: Accounting Choices, Political Corruption, Rent Seeking

JEL Classification: M41, G38

Suggested Citation

Zhang, Huai and Zhang, Jin, Political Corruption and Accounting Choices (March 30, 2019). Available at SSRN: https://ssrn.com/abstract=3362732 or http://dx.doi.org/10.2139/ssrn.3362732

Huai Zhang

Nanyang Technological University (NTU) ( email )

Nanyang Business School
50 Nanyang Ave.
Singapore, 639798
Singapore
+65-6790-4097 (Phone)

Jin Zhang (Contact Author)

Monash University ( email )

23 Innovation Walk
Wellington Road
Clayton, Victoria 3800
Australia

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