Political Connection, Accounting Information And Debet Covernants

Political connection of enterprise is prevalent in the world, it can bring many benefits to the enterprise, such as more preferential loans, lower taxes, and more government assistance, etc. Accounting information reflect the company's financial situation and operating results, is the important source of information for bank's credit decisions. So, whether political connection of corporate has impact on the role of accounting information in bank credit decisions? This is the main question which the paper will answer.This paper using the methods of principal component analysis, single variable and multivariate analysis, with a sample of the A-share listed private companies over 2006-2009 periods in China, and the ratio of new loans and costs of loan as explanatory variables, to reveals the economic consequences of political connection from the perspective of usefulness of accounting information in debt covenants. This paper found the following conclusions:First, accounting information is of usefulness in debt covenants, play an important role on bank loans; Second, the ratio of new loans is positive related to the solvency and profitability, and political connection can weaken the sensitivity of the ratio of new loans to the profitability; Third, the costs of loan is negatively related to the solvency and profitability, and political connection can weaken the sensitivity of the costs of loan to the profitability; Fourth, the group regression based on profitability shows that the impact of political connection on usefulness of accounting information in debt covenants mainly in the companies with weak profitability, which shows that the political connection has hidden guarantee effect to obtain bank loans and reduce costs of loan.This paper reveals the mechanism how political connection affect the access to bank loans from the perspective of usefulness of accounting information in debt covenants, expands the research on economic consequences of political connection. Meanwhile, this paper introduces the political connection into the research on accounting information disclosure, enriches the research literature of factors affecting the usefulness of accounting information in contracts.