Implications of Political Patronage and Political Costs for Corporate Disclosure

Abstract

We take advantage of China's relationship-based institutional setting to investigate whether and how firms' disclosure decision is affected by political patronage and associated political costs considerations. Using a sample of 65 firms involved in the Shanghai Pension corruption scandal of 2006, we find that relative to benchmark firms, the connected firms are associated with lower levels of disclosure prior to the scandal. However, they significantly increased their disclosures in the year immediately following the public exposure of the scandal. A content analysis indicates that the increased disclosures are value-relevant, and are not merely used as a public relations effort to subdue public outcry in the immediate aftermath of the scandal. Cross-sectional analyses further reveal that the increase in disclosure is positively associated with the extent of firm's guanxi dependence and type/severity of involvement in the scandal. We conclude that the increased disclosures are in response to the heightened risk and potential costs of regulatory and public scrutiny in the wake of a major event involving high political and public sensitivity. The evidence is supportive of the political costs hypothesis, and has important managerial and policy implications.

Political connections and corporate social responsibility reporting in Portugal

“…Some of these studies explore the case of financial reporting (Chaney et al , 2011; Batta et al , 2014; Guedhami et al , 2014; Harymawan and Nowland, 2016). Other studies explore how political connections are associated with non-financial reporting (Cheng et al , 2017; Rahman and Ismail, 2016; Al-Hadi et al , 2016; Chen et al , 2017). We focus on the latter type of studies in view of their relevance to our study of the relation between CPC and CSR reporting.…”

“…Chen et al (2017, p. 96) argue that as follows: firms that enjoy political patronage are less likely to provide informative disclosures, given the high costs (relative to benefits) of disclosure; and loss of political patronage in a highly publicized scandal forces them to increase their disclosures to avoid the increased risk and costs of public scrutiny or political/regulatory sanctions. …”

“…Their findings suggest that connected firms presented lower levels of disclosure than those of benchmark firms prior to the scandal and that they significantly increased their voluntary disclosures in the wake of the loss of their political patrons. Chen et al (2017, p. 92) concluded that higher levels of voluntary disclosure after the scandal could be deemed as a response “to the heightened risk and potential costs of regulatory and public scrutiny in the wake of a major event involving high political and public sensitivity.” Their findings indicate a negative relation between political connections and voluntary disclosure. They interpret these findings as of the extent that politically connected firms are shielded from market discipline because of their undue advantages derived from political connectedness, and to the extent that such firms are not necessarily more efficient and maybe more opaque, severing political ties and reinforcing market discipline can improve resource allocation, corporate transparency and investor protection” (pp.…”

Corporate Financial Disclosure Measurement in the Empirical Accounting Literature: A Review Article

“…Automated textual analysis is often accompanied by some element of manual textual analysis depending on the research method. Examples of studies that use automated textual analysis are Schleicher et al (2007), You and Zhang (2009) and Elshandidy, Fraser, and Hussainey (2015), and examples of manual textual analysis studies are Linsley and Shrives (2006), Boesso and Kumar (2007), and Chen et al (2017a).…”

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“…Khlif and Amara (2018) investigate the link between political connection and tax practices by focusing on developed, developing and emerging economies. However, Chen et al (2017) recognize the loss of political connection as a factor of increased risk and regulatory sanctions under the theory of political costs.…”