Financial reporting and corporate political connections: An analytical model of interactions

Christopher Bleibtreu, Roland Königsgruber and Thomas Lanzi ()
Additional contact information
Christopher Bleibtreu: BI Norwegian Business School [Oslo]
Thomas Lanzi: BETA - Bureau d'Économie Théorique et Appliquée - AgroParisTech - UNISTRA - Université de Strasbourg - Université de Haute-Alsace (UHA) - Université de Haute-Alsace (UHA) Mulhouse - Colmar - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement

Post-Print from HAL

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 (search for similar items in EconPapers)
Date: 2022-05
Note: View the original document on HAL open archive server: https://hal.univ-lorraine.fr/hal-03957978
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published in Journal of Accounting and Public Policy, 2022, 41 (3), pp.106904. ⟨10.1016/j.jaccpubpol.2021.106904⟩

Downloads: (external link)
https://hal.univ-lorraine.fr/hal-03957978/document (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03957978

DOI: 10.1016/j.jaccpubpol.2021.106904

Access Statistics for this paper

More papers in Post-Print from HAL
Bibliographic data for series maintained by CCSD ().