Political Connections and Earnings Quality - Empirical Evidence from Chinese Private Listed Companies

Abstract

This paper studies the influence of political connections on corporate earnings quality, as well as the inherent interaction mechanism of their relationship. Taking the private companies listed in Shanghai Stock Exchange and Shenzhen Stock Exchange in the period 2003- 2008 as the sample, and judging whether a firm is politically connected by whether the firm's senior executives currently or formerly serve in the government, we find evidence that the earnings quality of a politically connected firm is poorer than that of a non politically connected firm provided other conditions are the same. The conclusion supports the "tunneling hypothesis" of political connections.