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Article
Publication date: 7 November 2016

Mouna Ben Rejeb Attia, Naima Lassoued and Anis Attia

The purpose of this paper is to test the political costs hypothesis in emerging economies characterized by interventionist governments and weak protection of property rights. The…

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Abstract

Purpose

The purpose of this paper is to test the political costs hypothesis in emerging economies characterized by interventionist governments and weak protection of property rights. The paper uses executives’ political connection and state control to measure firms’ political costs.

Design/methodology/approach

Based on a sample of Tunisian firms, univariate and multivariate analyses are used to test whether firms’ political costs have any impact on earnings management.

Findings

The empirical analysis indicates that the executives’ political connection is not directly related to earnings management. However, the interaction between executives’ political connection and the state control affects the firm’s sensitivity to political pressure and its earnings management practices. More specifically, this study provides evidence that non-connected firms and state-controlled firms attempt to use accounting policies to decrease their earnings especially during periods of the former government when they had to face high political costs. This finding is robust to comparing means of political cost indicators between different groups. Indeed, private firms with political connection enjoy a significantly lower insurance right, tax and donations and grants compared to other firms.

Research limitations/implications

This study provides empirical evidence for the specific application of accounting theory in emerging economies.

Practical implications

Political influence may be an important criterion that will be used by auditors and investors to appreciate and detect specific manipulations of accounting earnings. Similarly, regulators should be aware of the political factors effect on discretionary behavior of managers to provide appropriate rules and standards.

Originality/value

The study is a pioneer in proving that a firm’s size is not always a suitable measure of its political cost. It extends the accounting literature on the role of political economy in the application of the political costs hypothesis. This hypothesis is confirmed in emerging economies by providing new and significantly measure of firms’ political costs

Details

Journal of Accounting in Emerging Economies, vol. 6 no. 4
Type: Research Article
ISSN: 2042-1168

Keywords

Article
Publication date: 1 January 1997

Andrew J Lemon and Steven F Cahan

This paper examines the environmental disclosure decisions of New Zealand firms in response to political costs arising from the enactment of the Resource Management Act (RMA) in…

Abstract

This paper examines the environmental disclosure decisions of New Zealand firms in response to political costs arising from the enactment of the Resource Management Act (RMA) in 1991. Unlike prior disclosure studies, this study provides a more rigorous test of the political cost hypothesis by identifying firms that were directly affected by RMA and by measuring the change in environmental disclosures over the pre‐ to post‐RMA period. We hypothesise that the increase in environmental disclosures will be a positive function of the firm's political visibility. Using six different measures of political visibility and three composite measures derived from a factor analysis of the individual measures, the evidence indicates that, in general, politically visible firms were more likely to increase their environmental disclosures after RMA whether the change was measured on a dichotomous or continuous basis. Overall these results provide support for the political cost hypothesis.

Details

Asian Review of Accounting, vol. 5 no. 1
Type: Research Article
ISSN: 1321-7348

Article
Publication date: 1 February 2016

Daniel F. Hsiao, Yan Hu and Jerry W. Lin

This study aims to examine whether US oil and gas companies engaged in earnings management during the 2011 Arab Spring, which resulted in significant increases in both crude oil…

Abstract

Purpose

This study aims to examine whether US oil and gas companies engaged in earnings management during the 2011 Arab Spring, which resulted in significant increases in both crude oil and gasoline prices.

Design/methodology/approach

Following a similar research methodology from prior research, this study tests the existence of earnings management based on discretionary total accruals, current accruals and non-current accruals to determine whether both large petroleum refining firms and relatively small oil and gas-producing firms, jointly and separately, lowered reported earnings.

Findings

The results show that, overall, US oil and gas companies as a group engaged in income-decreasing earnings management during the Arab Spring. The results seem to support the political cost hypothesis. However, further analyses indicate that the results are driven by abnormal income-decreasing accruals of the relatively small oil and gas-producing firms, which are politically less sensitive.

Research limitations/implications

The findings suggest that there may be other non-political cost incentives, such as income smoothing, for the relatively small oil and gas-producing firms managing earnings downward during periods of large oil price increases. However, the possibility for firms with reversals of income-increasing activity from other quarters is not ruled out.

Originality/value

This study not only is the first empirical study of earnings management by oil and gas companies during the Arab Spring, but also contributes to extant earnings management literature regarding political cost hypothesis, which still remains a major concern for US oil and gas companies.

Details

Pacific Accounting Review, vol. 28 no. 1
Type: Research Article
ISSN: 0114-0582

Keywords

Article
Publication date: 4 January 2011

Wendy Heltzer

The purpose of this paper is to examine the relationships between earnings management (EM) and subsamples of corporate environmental responsibility (CER).

3473

Abstract

Purpose

The purpose of this paper is to examine the relationships between earnings management (EM) and subsamples of corporate environmental responsibility (CER).

Design/methodology/approach

KLD data are used to generate subsamples of environmental “strengths” and “concerns”. Differences in EM are studied across subsamples, using discretionary accruals to proxy for EM. The samples consist of 2,171 US firms.

Findings

Firms with at least one environmental strength do not exhibit statistically different levels of EM, relative to environmentally neutral firms, while firms with at least one environmental concern do exhibit statistically greater EM (greater income‐increasing discretionary accruals), relative to other sample firms. Further, firms with multiple environmental concerns exhibit greater EM than firms with a single environmental concern. These findings do not support the political cost hypothesis per the CER/EM literature, but they do support the institutional hypothesis (in the case of environmental strengths) and myopia avoidance hypothesis (in the case of environmental concerns) per the broader corporate social responsibility (CSR)/EM literature.

Research limitations/implications

The findings are limited to US firms; results may not be transferable to other countries. KLD data are binary, and thus may not capture the full array of CER.

Practical implications

The findings may aid interested parties in detecting EM.

Originality/value

The paper provides a new testing environment for theoretical frameworks established in the CER/EM and CSR/EM literatures. Additionally, the findings differ across subsamples, suggesting that the relationship between CER and EM is asymmetric.

Details

Managerial Auditing Journal, vol. 26 no. 1
Type: Research Article
ISSN: 0268-6902

Keywords

Article
Publication date: 8 September 2020

Karen Ann Craig and Brandy Hadley

This paper aims to investigate the political cost hypothesis and the effects of political sensitivity-induced governance in the US bond market by using yield spreads from bonds…

Abstract

Purpose

This paper aims to investigate the political cost hypothesis and the effects of political sensitivity-induced governance in the US bond market by using yield spreads from bonds issued by a diverse sample of US government contractors.

Design/methodology/approach

Fixed effects regression analysis is used to test the relation between the political sensitivity of government contractor firms and their cost of debt.

Findings

Results illustrated that government contractors with greater political sensitivity are associated with larger yield spreads, indicating that bondholders require a premium when firms endure the costs of increased political oversight and the threat of outside intervention, reducing the certainty of future income. However, despite the overall positive impact of political sensitivity on bond yield spreads on average, the authors found that the additional government oversight is associated with lower spreads when the firm is facing greater repayment risk.

Practical implications

Despite the benefits of winning a government contract, this paper identifies a direct financial cost of increased political sensitivity because of additional firm oversight and potential intervention. Importantly, it also finds that this governance is valued by bondholders when faced with increased risk. Firms must balance their desire for government receipts with the costs and benefits of dependence on those expenditures.

Originality/value

This paper contributes to the literature in its exploration of political sensitivity as an important determinant of the cost of debt for corporate government contractors. Specifically, the authors document a significant risk premium in bond pricing because of the joint effects of the visibility and importance of government contracts to the firm.

Details

Corporate Governance: The International Journal of Business in Society, vol. 20 no. 7
Type: Research Article
ISSN: 1472-0701

Keywords

Article
Publication date: 8 August 2023

Hongji Xie, Shulin Xu and Zefeng Tong

This study examines the effect of local government debt (LGD) on corporate earnings management using 25,624 firm-year observations from 2007 to 2019.

Abstract

Purpose

This study examines the effect of local government debt (LGD) on corporate earnings management using 25,624 firm-year observations from 2007 to 2019.

Design/methodology/approach

Pooled ordinary least squares (OLS) regression is used to examine the impact of LGD on earnings management. A difference-in-differences (DID) method is also used to alleviate potential endogeneity.

Findings

Results show that LGD motivates firms to increase earnings management, especially income-decreasing earnings management. Findings are robust to DID method and robustness tests. Heterogeneity analyses show that the positive effect of LGD on earnings management is pronounced in firms with political dependence and moderated by external governance mechanisms. Further discussions indicate that tax enforcement is an underlying channel for LGD to affect earnings management. Firms engage in downward real earnings management by increasing their abnormal discretionary expenditures and higher LGD leads to a greater book-tax difference in those firms that manipulate income-decreasing earnings management.

Originality/value

This study contributes towards examining the political costs hypothesis, the microeconomic effects of LGD and the determinants of earnings management.

Details

International Journal of Emerging Markets, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1746-8809

Keywords

Article
Publication date: 26 September 2008

Isabel Gallego Álvarez, Isabel María García Sánchez and Luis Rodríguez Domínguez

This work aims to check the validity of the hypotheses of the agency, signalling, political costs and proprietary costs theories in the disclosure of information online. More…

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Abstract

Purpose

This work aims to check the validity of the hypotheses of the agency, signalling, political costs and proprietary costs theories in the disclosure of information online. More specifically, to determine the prevalence of the purposes alleged by those theories, we analyse the effect of industry concentration and other factors on an index of items of information disclosed on corporate web sites, in its entirety as well as its breakdown into information whose elaboration and disclosure is compulsory and information whose elaboration and disclosure is voluntary.

Design/methodology/approach

First, a content analysis of the quoted non‐financial Spanish companies' web sites was carried out. To do this, three disclosure indexes were created and applied. Then three causal models were estimated by applying a linear regression, taking several factors into consideration.

Findings

The findings emphasise the relevance of the hypotheses of political costs theory as the main explanatory factor for voluntary disclosure of information on the internet by quoted Spanish firms. In particular, the hypothesis that the greater the firm's monopolistic power, the more visible the company is and the more political costs it faces. To reduce these costs, such companies have an interest in disclosing greater amounts of information.

Practical implications

The researchers have analysed only one year of data from one country, but this analysis is significant because the motives which lead a firm to disclose information can be very different depending on its geographic location, especially if the factors which determine disclosure practices are associated with the political costs that the companies face.

Originality/value

This is the first study to examine the effect of industrial concentration on the disclosure of information online.

Details

Online Information Review, vol. 32 no. 5
Type: Research Article
ISSN: 1468-4527

Keywords

Book part
Publication date: 9 November 2004

Toby Stock

This article examines the extent to which costs imposed on customers and other factors influence tax-motivated income shifting when corporate taxpayers expect tax rates to…

Abstract

This article examines the extent to which costs imposed on customers and other factors influence tax-motivated income shifting when corporate taxpayers expect tax rates to decline. I find that sellers of durable goods shift defer less income to lower tax rate periods than sellers of nondurable goods. This is consistent with shifting firms considering the effect of their income shifts on their customers. There is also limited evidence that firms with greater market power shift more income than other firms. In addition, I find evidence that, controlling for political costs and scale effects, smaller firms shifted more income than larger firms. This result is inconsistent with a “tax sophistication” hypothesis that larger firms are better able to engage in tax planning activities than smaller firms.

Details

Advances in Taxation
Type: Book
ISBN: 978-0-76231-134-7

Article
Publication date: 14 December 2023

Qiujie Dou and Weibin Xu

This study aims to explore the reasons why some Chinese private entrepreneurs are reluctant to make charitable donations, with a focus on the perspective of “original sin”…

Abstract

Purpose

This study aims to explore the reasons why some Chinese private entrepreneurs are reluctant to make charitable donations, with a focus on the perspective of “original sin” suspicion. The objective of this paper is to examine the challenges faced by these entrepreneurs, especially those suspected of “original sin,” when making charitable donations, and to provide recommendations for addressing these challenges.

Design/methodology/approach

Using data from the Chinese Private Enterprises Survey Database for the years 2008, 2010, 2012 and 2014, this study used ordinary least squares regression to examine the relationship between “original sin” suspicion and charitable donations from private enterprises.

Findings

This study examined the impact of “original sin” suspicion on charitable donations and found that it significantly reduces the donations of privatized enterprises. The negative impact of “original sin” suspicion on charitable donations is especially pronounced in small and medium-sized enterprises (SMEs), as well as those that have experienced changes in local leadership.

Originality/value

While previous research focused on the motivations of private enterprises that donated, they failed to identify which types of enterprises were reluctant to donate and why. By focusing on the “original sin” suspicion surrounding entrepreneurs in privatized enterprises and the political costs they face, this study sheds light on the challenges they encounter in charitable donations and explains why privatized enterprises, especially SMEs, are unwilling to make charitable donations.

Details

Chinese Management Studies, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1750-614X

Keywords

Article
Publication date: 1 February 2004

KAOUTHAR LAJILI

This research paper examines the information content and managerial incentives for labour cost voluntary disclosures for a sample of United States publicly traded companies. We…

Abstract

This research paper examines the information content and managerial incentives for labour cost voluntary disclosures for a sample of United States publicly traded companies. We focus on labour productivity and managerial efficiency in labour usage and argue that these human capital indicators could provide valuable information to capital market participants seeking human resource‐type of performance measures and signals. Labour productivity and efficiency indicators are estimated following a production function approach and are included in logistic regressions to help explain and predict labour cost voluntary disclosure decisions. We find that labour productivity and managerial efficiency in labour use indicators are generally different between disclosing and non‐disclosing firms, and that proprietary information costs and political cost proxies are significantly related to labour costs voluntary disclosure, consistent with previous literature. These empirical results corroborate the ‘proprietary information’ hypothesis of voluntary disclosure where the strategic costs of disclosure outweigh the signaling benefit from disclosing human capital information.

Details

Journal of Human Resource Costing & Accounting, vol. 8 no. 2
Type: Research Article
ISSN: 1401-338X

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