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Accounting conservatism, corporate governance and political connections

Nor Farizal Mohammed (Universiti Teknologi MARA, Shah Alam, Malaysia)
Kamran Ahmed (Department of Accounting, La Trobe University, Melbourne, Australia)
Xu-Dong Ji (School of Accounting, RMIT University, Melbourne, Australia) (The International Business School Suzhou (IBSS), Xi’an Jiaotong-Liverpool University, China)

Asian Review of Accounting

ISSN: 1321-7348

Article publication date: 2 May 2017

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Abstract

Purpose

The purpose of this paper is to examine the relationship between accounting conservatism, corporate governance and political connection in listed firms in Malaysia where political influence plays a significant role in the capital market and in many business dealings.

Design/methodology/approach

By utilizing 824 firm-year observations comprising large listed companies over a period of four years from 2004, this study uses ordinary least squares regression models to investigate the relationship between accounting conservatism, corporate governance and political connections in Malaysia. Multiple measures of conservatism developed by Basu (1997) and Khan and Watts (2009) are employed.

Findings

The results show evidence of accounting conservatism (bad news being recognized earlier than good news) in Malaysia. Further, the results reveal that better corporate governance structure in terms of board independence is positively associated with accounting conservatism while management ownership is negatively associated with it. However, political connection has a negative moderating effect on the positive relationship between accounting conservatism and board independence. The results also suggest political connections have a positive association with firm’s future performance.

Originality/value

This study is the first in investigating the effect of political connections on accounting conservatism in Malaysian context and how political connections negatively affect the monitoring role of the corporate boards. By directly measuring political connection and controlling for various corporate governance mechanisms and firm-specific attributes, this study contributes to enhance the authors’ understanding of the political influence in financial reporting quality and firm performance in an emerging market setting.

Keywords

Citation

Mohammed, N.F., Ahmed, K. and Ji, X.-D. (2017), "Accounting conservatism, corporate governance and political connections", Asian Review of Accounting, Vol. 25 No. 2, pp. 288-318. https://doi.org/10.1108/ARA-04-2016-0041

Publisher

:

Emerald Publishing Limited

Copyright © 2017, Emerald Publishing Limited

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