Political connections and accounting conservatism: Evidence from Chinese listed firms

This study investigates the effect of political connections on accounting conservatism for Chinese firms. Using the Chinese non-state-owned listed companies for the period 2008-2013, we find that the relation between political connections and accounting conservatism is insignificant because political connections may impair accounting conservatism on one aspect but also may strengthen accounting conservatism on the other aspect. This research contributes to the literature on the effect of political connections on firms’ various business activities by focusing on firms’ conservatism level of financial reporting using a unique institutional setting in China. Considering the importance of political background in transition economies like China, it is an important question whether political connections affect accounting conservatism. Our research method differs in that we measure the political connections directly using firms’ CEO or board chairman’s political background, while most prior studies measure them indirectly using firms’ donations to political elections or firms’ economic importance to the local governments. Our direct measure reduces noise in the political connection variable and allows us to more accurately investigate the effect of politically connected managers, not the effect of politically important entities, on firms’ accounting conservatism.