Corruption Culture and Accounting Quality

53 Pages Posted: 6 Dec 2019

See all articles by Yunsen Chen

Yunsen Chen

Central University of Finance and Economics (CUFE)

Limei Che

BI Norwegian Business School

Dengjin Zheng

Central University of Finance and Economics

Hong You

Southwest University - College of Economics and Management

Date Written: September 2019

Abstract

This paper examines the impact of corruption culture on accounting quality (AQ) of listed firms at the municipal level in China. We consider municipalities with (without) corrupt top government officials as having high (low) corruption culture. To isolate the effect of corruption culture, we use the arrest of corrupt officials (the events) to capture the change in local corruption culture, and apply the difference-in-difference method to compare AQ of firms operating in the jurisdictions of corrupt officials pre and post the events, compared to control firms. We find that AQ of firms affiliated with corrupt officials is higher after the events, which is robust to the placebo test, time-trend analysis, and various robustness tests. We complement the literature by showing that the increase in AQ is greater for firms associated with more powerful officials and having stronger connections with corrupt officials. Moreover, the positive effect on accounting quality is stronger in the post-2012 period. Further, we document that firms improving AQ after the events issue more SEOs and have lower cost of capital. Finally, analyses on channels firms used to improve AQ show that firms switch to higher quality auditors, have better internal control, and issue more management forecasts. This study has implications for policymakers in countries that suffer from corruption.

Keywords: Corruption Culture; Accounting Quality; Local Government Officials

Suggested Citation

Chen, Yunsen and Che, Limei and Zheng, Dengjin and You, Hong, Corruption Culture and Accounting Quality (September 2019). Journal of Accounting and Public Policy, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3490343 or http://dx.doi.org/10.2139/ssrn.3490343

Yunsen Chen

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

HOME PAGE: http://yunsenchen.weebly.com/

Limei Che

BI Norwegian Business School ( email )

N-0442
Oslo
Norway

Dengjin Zheng (Contact Author)

Central University of Finance and Economics ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

Hong You

Southwest University - College of Economics and Management ( email )

No.2 Tiansheng Road
Chongqing
China

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