Political Connection, Accounting Quality And Firms’ Investment Efficiency

Investment is one of the most important factors to affect economic development ofChina, but non-efficiency investment has become a common phenomenon in theChinese enterprises, which therefore has a negative impact on the healthy developmentof the economy. Extant studies show that firms’ investment failure is due to asymmetricinformation and agency problems, which can be effectively improved by high quality ofaccounting information. In addition to financial factors, the regulatory environment canalso affect the efficiency of investment. As Chinese enterprises which are going throughthe transition economies, the government, an important institutional background, has aneffect on the corporate behavior. Political association, established by firms andgovernment, and government ultimate control over firms are the two essential featuresof government’s intervention in the enterprises. Therefore, set in the background of therelationship between government and enterprises, studying the influence accountinginformation has on firm investment efficiency, based on which, adding politicalassociation and government ultimate control--two governments backgroundelements—to further analyze the relationship between quality of accounting informationand corporate investment efficiency under the respective influence of politicalassociation, the government eventually control as well as political association andgovernment ultimate control people interact, is a useful exploration to break though theproblem of inefficient investment of Chinese enterprises, and also provides theoreticalbasis and empirical evidence for the role of government in the economy as well as therevolution of relation between government and enterprise..Selecting the Listed companies in China as the research object, adopting a methodof combining the theoretical and empirical thesis, this paper mainly developed researchin the following aspects:First, owing to financing constraints caused by information asymmetry as well asthe agency problems between investors and managers, firms make inefficientinvestment, while the high quality of accounting information can improve informationasymmetry and agency problems. Therefore, this paper studies the correlation betweenthe quality of accounting information and the efficiency of investment from the fourangles of accounting conservatism, surplus radical degrees, earnings smoothness andlow earnings quality. The results show that the high quality of accounting information can effectively improve the enterprise underinvestment as well as overinvestment, andenhance the efficiency of investment.Second, firms would like to establish political connection with government inorder to obtain favorable resource. Admittedly, political connection is able to bringmany resources and much convenience. However, the establishment of politicalassociation also requires companies to pay the cost. Does political connection-anonmarket-based means-bring the firms benefits or losses? This paper examines theimpact of the political association on the relationship between accounting informationand investment efficiency. The study found that corporate political associationweakened the improvement effect the high quality of accounting information has oninvestment inefficient, and the political association played a negative role in theenterprise.The last but not the least, the Government, as the ultimate control person, oftenwill bring governance issues as government intervention and internal control. Whatwould be the economic results of these governance problems? This paper examines theeffect on the relationship between accounting information and investment efficiencywhen government is the ultimate control person. The study found that government, theultimate control, weakens the improvement effect of the quality of accountinginformation on firm investment efficiency in the state-owned enterprises, that is to say,ultimate control of the government brings a negative effect. Furthermore, as for thefirms which have different ultimate control persons, the private enterprises, in order toenter government regulated industries and obtain government control of resources, aremore dependent on political association than the state-owned enterprises. Politicalassociation of state-owned enterprises, on the other hand, can effectively inhibit thegovernment’s intervention and weaken the negative effects of government ultimatecontrol over the enterprise. This paper studies the relationship between quality ofaccounting information and investment efficiency with the interact effect of politicalassociation and government as the ultimate control. The study found that with theinteract effect of political association and government ultimate control, negative impacton the improvement of accounting information over business investment is greater inthe non-state-owned enterprises, and the negative role of the political association playsin the non-state-owned enterprises, especially in the private enterprises, is more serious.Results above imply that it is necessary to further perfect our accounting systemand reinforce the supervision of accounting quality, and firms need think more of and increase accounting quality. Government should gradually weaken the function ofpolitical connection and the firms’ dependence of it. Further reform of SOE should becarried out to perfect SOE’s governance structure and reduce the government’sintervention. Only when better legal system is established and government’s function isconverted, can government actually become a HELPFUL HAND from aPLUNDEROUSE ONE.