Impacts of political connections on earnings quality of Chinese private listed companies

Abstract

This paper examined empirically the impacts of political connections on earnings quality, taking the private listed companies with or without political connections in 2006-2008 as the sample. We define the political connections are that the chairman of the board or CEO is one of government officials or members of People's Congress or Chinese People's Political Consultative Conference. We use accruals quality and earnings response coefficients to proxy the earnings quality. The results show that the accruals quality of the private listed companies with political connections is better than those without political connections. The inhibition of political connections on the earnings management is mainly reflected in the inhibition of "downward" earnings management, and its role in the "upward" earnings management is not that significant. From the view of market, political connections can improve the reaction extent of earnings in returns and increase earnings response coefficients. © 2011 Springer-Verlag Berlin Heidelberg.