Local Political Corruption and Financial Reporting Conservatism

51 Pages Posted: 19 Aug 2019 Last revised: 9 Sep 2019

See all articles by Xin (Simba) Chang

Xin (Simba) Chang

Nanyang Business School, Nanyang Technological University

Shanmin Li

Sun Yat-Sen University (SYSU)

Chun Liu

Sun Yat-Sen University (SYSU)

Liang Sun

Sun Yat-Sen University (SYSU)

Wenrui Zhang

The Chinese University of Hong Kong (CUHK) - Department of Finance

Date Written: January 2, 2017

Abstract

We examine the relation between local political corruption and firms’ financial reporting conservatism using provincial-level data on corruption in China. The results show that firms in more corrupt regions report more conservatively. In other words, firms in the more corruption-prone regions are more likely to speed the recognition of bad news and slow the recognition of good news in their reported earnings. Similar results are obtained when we use the recent anti-corruption campaign in China as a quasi-natural experiment. Further analysis reveals that the effects of local corruption on reporting conservatism are weaker when firms are less subject to expropriation by corrupt officials. In summary, our findings imply that firms adopt conservative accounting to systematically understate their earnings and asset values, thereby curbing the expropriation of firm resources by corrupt officials.

Keywords: Political Corruption, Anti-corruption Campaign, Conditional Accounting Conservatism, Financial Reporting, Earnings Shielding

JEL Classification: D22, D72, D73, M41

Suggested Citation

Chang, Xin and Li, Shanmin and Liu, Chun and Sun, Liang and Zhang, Wenrui, Local Political Corruption and Financial Reporting Conservatism (January 2, 2017). Available at SSRN: https://ssrn.com/abstract=3431661 or http://dx.doi.org/10.2139/ssrn.3431661

Xin Chang

Nanyang Business School, Nanyang Technological University ( email )

S3-B1B-76 Nanyang Avenue
Singapore, 639798
Singapore

HOME PAGE: http://www.ntu.edu.sg/home/changxin

Shanmin Li

Sun Yat-Sen University (SYSU) ( email )

135, Xingang Xi Road
Guangzhou, Guangdong 510275
China

Chun Liu

Sun Yat-Sen University (SYSU) ( email )

135, Xingang Xi Road
Guangzhou, Guangdong 510275
China

Liang Sun

Sun Yat-Sen University (SYSU) ( email )

135, Xingang Xi Road
Guangzhou, Guangdong 510275
China

Wenrui Zhang (Contact Author)

The Chinese University of Hong Kong (CUHK) - Department of Finance ( email )

Shatin, N.T.
Hong Kong

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