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Political incentives in firms’ financial reporting: evidence from the crackdown on corrupt municipal officials

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  • Xiuhua Wang

    (Hunan University)

  • Xi Gu

    (Hunan University)

Abstract

This paper examines political incentives in firms’ financial reporting during the anti-corruption campaign in China. We find robust evidence that the turnover of municipal officials due to the prosecution of corruption causes affiliated firms to strategically withhold good news relative to bad news. This effect is more pronounced among state-owned firms and firms located in highly corrupt places, while it is depressed among firms with the big-four auditing firms and among firms with Qualified Foreign Institutional Investors. Further tests show that this effect is temporary. We find affiliated firms release minor bad news on time and withhold minor good news during the turnover of corrupt municipal officials. Overall, our study provides novel evidence that firms have political incentives in financial reporting regarding the release of good and bad news, and the anti-corruption campaign in China can act as a governance mechanism to temporarily improve the financial reporting environment.

Suggested Citation

  • Xiuhua Wang & Xi Gu, 2019. "Political incentives in firms’ financial reporting: evidence from the crackdown on corrupt municipal officials," Economics of Governance, Springer, vol. 20(3), pages 255-284, September.
    • Handle: RePEc:spr:ecogov:v:20:y:2019:i:3:d:10.1007_s10101-019-00225-3
    DOI: 10.1007/s10101-019-00225-3
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