Aggregate Accounting Information and Political Turnover

• In Event: Research on Issues in China

Abstract

This paper provides empirical evidence that aggregation of firm-specific accounting information of publicly listed firms is informative about the career prospects of the political leadership of the region in which the firms are based, over and above the regional economic indicators. The study uses the Chinese context and focuses on the political career prospects of mayors, since they are the key political agents to lead the prefectural governments, implement the Communist Party resolutions, and manage regional economic development. Political career prospects can serve as an implicit contract to induce effort. However, the effectiveness of this implicit contract greatly depends on the characteristics of performance measures used to evaluate a mayor. The paper contrasts conventional macroeconomic indicators generated by the Bureau of Economic Analysis (BEA) with aggregate accounting information generated by listed firms in a region as alternative sources to assess regional economic development. The main finding of this paper is that aggregate accounting profitability is a good and timely predictor over and above macroeconomic indicators for the promotion of a mayor to party secretary of another prefecture, whereas the macroeconomic and accounting measures have no predictive value for political promotion or dismissal within a mayor’s own prefecture. The study contributes to the recent literature on the usefulness of accounting information of publicly listed firms in the political decision making context.

Authors

• Philip Joos, Tilburg University

• Yue Hu, Tilburg University