Political Connection, Earnings Quality And Its Risk Pricing

The political connection have become a hot subject that attracts more and moreattention of experts and scholars home and abroad, but the domestic researches on politicalconnection and the quality of accounting information as well as its economic consequencesare still lacked. The research has collected the political connection date of the private listedcompanies in Chinese capital market manually, including the connection with governmentsand their representatives, using method of dummy variable and evaluate to detect therelationship among the political connection and earnings quality as well as its risk pricing.Specifically, with the relevant data of private listed companies in China from2004to2009，the research has measured the accrual quality with the DD model, with the methodof regression analysis tested the influence of the political connection to the earnings qualitywhich uses the accrual quality as a measurable indicator, and then, detected the influenceof the political connection to the risk pricing of earnings quality. The results show that:(1)The earnings quality of the company that has political connections is worth than the onethat has none;(2) The political connection can reduce the risk pricing of earnings qualityby a certain extent. This shows that the political connection may bring the over trust andnegligence of the supervision in some extent, while it brings the scarce resource andpreferential policy to the company, and the investors lack of the ability to distinguish theearnings quality of the company with political connections, which can affect the reflectionof earnings quality in stock prices. Therefore, this study also sounds the alarm to thegovernment. As the government assists the private enterprises, it also should strengthen thesupervision of private enterprises, especially the accounting information quality of privateenterprises, and give the effective reminder and guide to the investors to help them makeright decisions.