Do Political Connections Reduce Earnings Management?

Mohamed Khalil, Sandy Harianto, Yilmaz Guney

Research output: Contribution to journalArticlepeer-review

5 Citations (Scopus)
99 Downloads (Pure)

Abstract

This study examines whether political connections are associated with earnings management (both accrual-based and real) and whether the association is influenced by corporate governance and external auditing qualities. Empirical evidence on the association between political connections and earnings management remains unclear and offers mixed results. Using a sample of Indonesian firms, we find that political connections are negatively related to accrual-based (AEM) and real (REM) earnings management. In addition, the negative relationship between political connections and earnings management is more pronounced in better-governed firms and those audited by one of the Big 4 auditors. The results are robust to alternative measures of earnings management, endogeneity, and subsample tests. Our results extend the literature by shedding additional light on the governance role and benefits of political connections.
Original languageEnglish
Pages (from-to)273-310
Number of pages38
JournalReview of Quantitative Finance and Accounting
Volume59
Issue number1
Early online date21 Apr 2022
DOIs
Publication statusPublished - Jul 2022

Bibliographical note

The final publication is available at Springer via http://dx.doi.org/10.1007/s11156-022-01062-y

Copyright © and Moral Rights are retained by the author(s) and/ or other copyright owners. A copy can be downloaded for personal non-commercial research or study, without prior permission or charge. This item cannot be reproduced or quoted extensively from without first obtaining permission in writing from the copyright holder(s). The content must not be changed in any way or sold commercially in any format or medium without the formal permission of the copyright holders.

This document is the author’s post-print version, incorporating any revisions agreed during the peer-review process. Some differences between the published version and this version may remain and you are advised to consult the published version if you wish to cite from it.

Funder

Funding was provided by the Indonesia Endowment Funds for Education (LPDP) at the Ministry of Finance.

Keywords

  • political connections
  • accrual-based earnings management
  • real earnings management
  • corporate governance
  • audit quality
  • Indonesia

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