Accounting conservatism, corporate governance and political connections

• Published in: Asian Review of Accounting
• Main Author: Mohammed N.F.; Ahmed K.; Ji X.-D.
• Format: Article
• Language: English
• Published: Emerald Group Publishing Ltd. 2017
• Online Access: https://www.scopus.com/inward/record.uri?eid=2-s2.0-85017463775&doi=10.1108%2fARA-04-2016-0041&partnerID=40&md5=f25f9c5581b59050c94614544bcb9e67

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. © Emerald Publishing Limited.