Financial Reporting and Corporate Political Connections: An Analytical Model of Interactions

Posted: 3 Nov 2021

See all articles by Christopher Bleibtreu

Christopher Bleibtreu

BI Norwegian Business School

Roland Koenigsgruber

SKEMA Business School

Thomas Lanzi

University of Lorraine

Date Written: November 2, 2021

Abstract

We analyze the interactions between accounting institutions and corporate political connections (CPCs). We present a model where a costly policy depends on the perceived economic condition of a firm. This policy and the valuation of the firm by capital market participants create incentives for the firm to manipulate its financial reports. A politician has some discretion over the policy and can use it to favor a connected firm. Our analysis reveals that the firm’s financial reporting is determined by the interplay of an accounting standard, enforcement strictness, and the salience of the policy for the firm. The possibility to manipulate the financial reports imposes an upper boundary on the value of political connectedness which does not exist if only truthful reporting is possible. The reason is that a low credibility of reported figures leads only to a weak revision of the policy. In general, the value of CPCs is highest when the financial reporting regime evenly splits between firms in good and bad economic condition. Our analysis further suggests that while connected firms generally report being in good condition more often than non-connected firms do, the effect of CPCs on absolute reporting manipulation depends on policy salience. If policy salience is low, connected firms exhibit a higher absolute degree of manipulation than non-connected firms do; the opposite holds if policy salience is high.

Keywords: Conservative and liberal accounting standards, Corporate political connections, Enforcement, Strategic financial reporting

JEL Classification: D72, D78, D82, M49

Suggested Citation

Bleibtreu, Christopher and Koenigsgruber, Roland and Lanzi, Thomas, Financial Reporting and Corporate Political Connections: An Analytical Model of Interactions (November 2, 2021). Journal of Accounting and Public Policy, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3954826

Christopher Bleibtreu

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

Roland Koenigsgruber (Contact Author)

SKEMA Business School ( email )

Lille
France

Thomas Lanzi

University of Lorraine ( email )

Lorraine
France

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