Political Connection And Earning Quality

In the background of transition economies and the “Guan xi” culture, politicalconnection has become common phenomenon among Chinese listed firms.State-owned firms get politically connected because of the government property inthe equity, and they also can build connection through appointing officers asmanagers. Private firms would build political connection through their managers inorder to have the equal opportunities to survive and develop as state-owned firms.However, previous literature shows political connection has an effect on the earningquality, which is the important evidence of investors’ and regulatory authorities’appraisal. Therefore it is important to study the relationship of political connectionand earning quality.This paper defines political connection based on the political background of thegeneral mangers in the Chinese situation. I also classify connection by theadministrative level and the connecting mode to study the differences and similaritiesamong the different kinds of connections’ effects on earning quality. Future I studywhether the former earning quality has an effect on the possibility of building apolitical connection. This paper analyses the relationship between political connectionand earning quality in the frame of the Resource-Based Theory, using the data ofChinese listed firms during the year2006to2011as sample. The paper finds that theearning quality of connected firms is obviously worse than that of non-connectedfirms, though connected firms are less than expected. The different kinds ofconnections have different effects on earning quality. The local connection and officer connection have obvious negative effect on earning quality, while there is no obviouseffect of the other two kinds of connections. Besides, the firms with worse formerearning quality are more likely to build local connection or representative connectionto avoid the punishment. It might be one reason to explain why politically connectedfirms have worse earning quality. The conclusions in this paper are still correct afterreplacing the variables of political connection and earning quality. It is proved theconclusions scientific and steady.