Political corruption and accounting choices
Our researchers
Summary
Political corruption is pervasive. In its 2012 Global State of Mind Report, Gallup reports that, for 108 out of 129 countries, the majority of adults being surveyed perceive corruption as a widespread problem in their government. The pervasiveness of political corruption motivates us to study how corruption affects firms’ accounting choices.
This study shows that firms in more corrupt areas are more likely to make accounting choices to lower reported earnings in order to strengthen their bargaining positions and shield their assets from the expropriation by corrupt officials.
The study also finds that the effect of corruption on earnings management is more pronounced for geographically concentrated firms, for firms without political connections, for firms in politically sensitive industries, for firms with lower transient institutional investor ownership, and for firms with less analyst coverage.
Takeaways for investors and policymakers
- Political corruption distorts the local economy
- Companies have incentives to underreport earnings
Implications for research
- This study adds to the understanding of the effect of political costs on firms’ accounting practices. We not only document downward earnings management in districts of high corruption but also suggest the specific accounting choices that firms make in order to depress reported earnings.
- This paper investigates the relation between corruption and earnings quality in an international setting and identifies the direction of corruption-induced earnings management.
- The research adds to the emerging literature that examines how political corruption affects firms. We contribute to this line of literature by documenting the effect of corruption on firms’ accounting choices.
Want to know more?
Zhang, H., & Zhang, J. (2023). Political corruption and accounting choices. Journal of Business Finance & Accounting, 50, 443–481.