Earnings persistence, institutional investors monitoring and types of political connections

Abstract

PurposeThe purpose of this study is to examine whether institutional investors monitoring attenuate (exacerbate) weaker earnings persistence in politically connected firms (PCFs). In addition, it investigates whether earnings persistence do vary according to different types of political connections.Design/methodology/approachThis study employs earnings persistence as measure of earnings quality and ordinary least squares (OLS) model to examine: (1) the moderating effect of institutional investors’ ownership on the association between earnings persistence and PCFs and (2) the association between different types of political connections and earnings persistence.FindingsThis study finds that institutional investors' ownership attenuates weaker earnings quality in PCFs, indicating effective monitoring. However, stronger earnings persistence is associated with PCFs with longer political ties, audited by big four audit firm and with higher CEO power.Originality/valueThis study reveals the lower earnings persistence in PCFs can be attenuated by institutional investors monitoring. However, findings also suggest that earnings persistence in PCFs is affected by duration of political ties, big four audit firm and CEO power. This suggests that PCFs should not be viewed as a homogeneous group of firms.

Types of politically connected firms and analysts' earnings forecast

“…Second, this study offers empirical evidence of forecast accuracy and dispersion to address the lack of studies examining forecast variables in Malaysia. A recent work by Tee and Rasiah (2020) found that strong earnings persistence was associated with PCON firms that had established political ties, and our results provided further validation of this by using different proxies for earnings quality. We focused on analysts' behaviors—specifically, their ability to make accurate earnings forecasts—because analysts play important roles as information intermediaries in global capital markets, reducing the information asymmetry between management and investors.…”

“…The results indicated that PCON firms with established political ties had stronger earnings persistence due to the fact that they were efficient and profitable in the long term, hence increasing their reputation and prestige. These results showed that PCON firms should not be treated as an analytically homogenous group of firms (Tee and Rasiah, 2020). In other words, it is necessary to examine different types of PCON firms to provide insights into their effect on various accounting and finance measurements.…”

“…A recent study in Malaysia by Tee and Rasiah (2020) produced evidence to differentiate between PCON firms based on their types. The results indicated that PCON firms with established political ties had stronger earnings persistence due to the fact that they were efficient and profitable in the long term, hence increasing their reputation and prestige.…”

“…Three studies of types of PCON firms (Phan et al , 2020; Tee and Rasiah, 2020; Wong and Hooy, 2018) were carried out in Malaysia. As a country with a large percentage of PCON firms, Malaysia provides an appropriate opportunity for researchers to examine different types of PCON firms based on their characteristics (Wong and Hooy, 2018).…”

Institutional investor heterogeneity and analyst recommendation: Malaysian evidence

“…In Malaysia, the effectiveness of institutional investors as monitoring bodies has been recognised in previous studies. For example, the existence of institutional investor leads to improved earnings quality (Abdul Jalil & Abdul Rahman, 2010;Tee & Rasiah, 2020), improved stock price informativeness (Tee, 2017), lower risk of stock price crashes (Tee, 2019;Tee, Yee et al, 2018), attenuated cost of debt (Tee, 2018), demand for higher audit quality (Tee et al, 2017), and is associated with higher dividend payouts (Benjamin et al, 2016) which indicate effective monitoring. Therefore, sell-side analysts as information intermediaries should issue more favourable stock recommendations for the companies with higher institutional investor ownership.…”