ERC Research On Financial Restatement And Political Connections

Financial reports, which act as one of the most significant and comprehensive information resources, can be the guarantee of the efficient operation of the security market. With no doubt, the quality of accounting information published exerts decisive effects on the potential investors’ expectations and confidence in the security market. However, since the1990s, the increasingly frequent financial restatements revealed at home and abroad have impaired the reliability of the expected performances of listed companies that are, to a large extent, derived from the past financial data and shaken the confidence of our investors to its foundations. Therefore, it is safe to conclude that the negative effects of financial restatements on the valuation of companies have been widely recognized and admitted unanimously by specialists and scholars all over the world.Just like the influences of financial restatements, the economic consequences resulted from the political connections related to listed companies have also aroused extensive attention and touched off continuous discussions in the global academic fields and practices. And concerning the indisputable fact that the transformation of our domestic system of security investments and administration has always been closely linked to and apparently featured by political factors, we have recognized the dominant role and superb position of our government in this aspect. Furthermore, it is not uncommon to hear about some listed companies, which are closed associated with the government and whose economic benefits have high correlation with political interests, make use of their priviledges guaranteed by the political connection to solve some problems proceeding from the failure of market mechanism. Due to the current atmosphere, a large number of researchers have made intensive studies of the relationship between the political connections and the quality of reported accounting earnings from the angle of political costs. In view of foregoing research thinking correlated to the effects of financial restatements and political connections on the accounting profits, the author came up with a assumption that whether the companies own the priviledges of political connection will make great differences in their Earnings Response Coefficient and the quality of reported accounting earnings.In the text, the companies listed in Shanghai and Shenzhen A Stock Market during the period from2005to2009are considered as the sample selection range, and800listed companies which published financial restatements, together with800matching ones are comprehensively studied as the major research object. To begin with, the author manages to test whether the companies with restatements have remarkably declining quality of accounting earnings. Then, on the basis that before-mentioned assumption is tenable, select231couples of listed privately-run enterprises with restatements and check whether there are notable differences between the enterprises with political connections, such as the entrepreneurs are deputies to the People’s Congress or the CPPCC committeemen,and those without political connections in the quality of accounting earnings.The results of studying suggests that:1. When there are financial restatements existing, the ERCs of those companies are apparently negative. Moreover the quality of their accounting earnings is much poorer than that of companies not involved in the restatements;2. When there are both financial restatements and political connections existing, the ERCs of those companies are obviously positive, which means that the existence of political connections will exert remarkably weakening and even offsetting effects on the declining quality of accounting earning resulted from financial statements.The selected topic of the text is innovative to some extent:First, it is worth our attention that the combination of financial restatements and political connections in the explanation and studies of their joint influences on the companies’accounting earnings and ERCs is original, and the author also limits the political connections to the fields of National People’s Congress and the CPPCC; Second, the author predetermines the dummy variables as the criterion of judging the existence of financial restatements and political connections, and has a good control on possible influences from the growth of companies, systematic risk, asset-liability ratio and the scale; Finally, the conclusion is also meaningful and can acts as a reference for our Listed Company Supervision Department in the aspect of efficient regulation on the financial restating.