Political Connections and Earnings Quality: Evidence from Malaysia Corporate Sector

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Abstract

This study empirically examines the association between political connection and earnings quality in Malaysia. Earnings quality is measured by accruals quality, earnings persistence, earnings predictability, earnings smoothness, and earnings value relevance. This study finds evidence that political connection is associated with lower earnings predictability. The results also indicate that political connection is associated with lower earnings persistence during the 1997 Asian financial crisis period (1997-1998) and lower earnings smoothness in the post crisis period. However, there is no evidence that political connection is associated with accruals quality and value relevance of earnings.
This study extends the literature on the role of political economy in financial reporting. To some degree, evidence from the Malaysian corporate sector suggests that political connection is associated with lower earnings quality.

Author

• Yuyun Aning Sejati, University of Wisconsin–Oshkosh