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Local political corruption and Firm's non-GAAP reporting

Author

Listed:
  • Chen, Xia
  • Jiang, Xuejun
  • Lu, Louise Yi
  • Yu, Yangxin

Abstract

We examine whether local political corruption affects managers' discretionary disclosures of non-GAAP earnings. Using United States Department of Justice data on the number of corruption convictions of government officials, we find that firms headquartered in more corrupt districts (1) are less likely to report non-GAAP earnings, (2) have less aggressive non-GAAP earnings disclosures, and (3) experience a significant decline in the exclusion magnitudes of non-GAAP earnings. These results are more pronounced for firms with concentrated operations in their headquarter states and are robust to controlling for demographic characteristics, employing alternative corruption and non-GAAP measures, using the instrumental variable approach, and conducting a difference-in-difference analysis based on firms' relocation. Finally, we show that as local political corruption increases, managers exclude lower levels of both recurring and non-recurring items when calculating non-GAAP earnings. Overall, the results suggest that managing non-GAAP reporting is one channel through which firms could deter rent-seeking by corrupt officials.

Suggested Citation

  • Chen, Xia & Jiang, Xuejun & Lu, Louise Yi & Yu, Yangxin, 2021. "Local political corruption and Firm's non-GAAP reporting," Journal of Corporate Finance, Elsevier, vol. 70(C).
    • Handle: RePEc:eee:corfin:v:70:y:2021:i:c:s0929119921001930
    DOI: 10.1016/j.jcorpfin.2021.102071
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    More about this item

    Keywords

    Political corruption; Rent seeking; Non-GAAP disclosure;
    All these keywords.

    JEL classification:

    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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