Abstract
We investigate how local political corruption shapes firms’ financial reporting conservatism in the United States. We find that firms located in more corrupt districts conduct higher level of conservative accounting as measured by Basu’s (1997) asymmetric timeliness coefficient. The results are robust to the inclusion of a broad set of firm and region characteristics, instrumental variable analysis, matching analysis, analysis for headquarter-relocated firms, and alternative proxies for local corruption and accounting conservatism. The positive effects of corruption on conservatism are accrued to firms with less bargaining power against the corrupt officials, firms less dependent on government for sales, firms with lower public visibility and firm-year observations in the pre-SOX period. Overall, our findings are consistent with an expropriation hypothesis that through adopting more conservative financial reporting policies, firms manage their earnings and net worth downward to shield their assets from corrupt officials’ expropriation.
Sign-in/Register to access full text options 
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
