Abstract
This study examines the effect of political connections (PCONS) on firms’ disclosure of forward-looking information choices in the context of developing countries. Using multivariate regression of panel data comprising 360 firmyear observations of non-financial firms listed on Bursa Malaysia between years 2014 and 2017, PCONS are found to be positively associated with disclosure of forward-looking information. However, such relationship only exists for non-financial forward-looking information. Using the stakeholder salience theory to further contribute to the body of knowledge, the strength of the connections suggests that a high composition of politically-connected directors on the board promotes greater information about the future in firms’ disclosure. The common connection through ownership of firms in emerging countries suggests the effective role of institutional shareholders in improving forecasting activities through high disclosure of forward-looking information. The study suggests a better appreciation of the hierarchical role of politically-connected directors on the board of types of forward-looking information presented to the stakeholders.
Highlights
Politicians have pervasive influence on businesses by assuming positions of Chief Executive Officers (CEO), chairpersons of the board or board members to induce investments among firms around the world (Boubakri, Cosset, & Saffar, 2008; Rusli, Mohd Saleh, Sabri Hassan, & Hafizuddin-Syah, 2019)
Note: forward-looking information disclosure (FWDLOOK) is forward-looking information; FINFL is financial forward-looking information; NONFINFL is non-financial forward-looking information; CONNECT is political connection; BUREAULVL is defined as index of political strength following Tsai et al (2019); politically connected firms’ director (PCONDIR) is defined as the composition of board of directors following Francis et al (2009); INDPDIR is board independence; BIG4 is quality audit; SIZE is firm size; LEV is leverage; BTM is firm growth; AGE is firm age; ROA is firm performance; and BODSIZE is board size
Note: FWDLOOK is forward-looking information; FINFL is financial forward-looking information; NONFINFL is non-financial forward-looking information; CONNECT is political connection; BUREAULVL is defined as index of political strength following Tsai et al (2019); PCONDIR is defined as the composition of board of directors following Francis et al (2009); DIRSHIP is a firm that is politically-connected through directorship; OWNSHIP is a firm that is politically-connected through equity holding; BODSIZE is board size; SIZE is firm size; LEV is leverage; BTM is firm growth; AGE is firm age; BIG4 is quality audit; ROA is firm performance; and INDPDIR is board independence
Summary
Politicians have pervasive influence on businesses by assuming positions of CEOs, chairpersons of the board or board members to induce investments among firms around the world (Boubakri, Cosset, & Saffar, 2008; Rusli, Mohd Saleh, Sabri Hassan, & Hafizuddin-Syah, 2019). The dominant effects of the helping hand (positive effects) over the grabbing hand (negative effects), as suggested under the political hypothesis, have increased the firms’ demand for political connections (PCONS), especially in developing economies. Prior literature has shown that political connections affect firm performance, financial decisions (through debt and equity) and transparency, i.e., disclosure of information (for example, Ball, Robin, & Wu, 2003). Not much is understood on the impact of the strength and types of political connections on a firm’s disclosure behaviour. The objective of this study is to investigate the effect of the strength of political connections and its types on a very specific type of information disclosure, namely, forward-looking (financial and non-financial) information disclosure. We attempt to answer the question: Do the strength and types of political connections influence the level and types of forward-looking information disclosure?
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