Political Connection, Audit Committee Characteristics And Quality Of Information Disclosure

The famous economists Shleifer, etc (1996) in his work,"The Grabbing Hand: Government Pathologies and Their Cures" has put forward the concept of The Government’s "a hand of action less governance","a Hand of support" and "a hand of plunder", and believe that The Government who work as "a hand of action less governance" when market functions well and work as "a hand of support" when market failure happens can increase the social welfare. But, on the other side, if the Government extends the hand of plunder, this will bring a disaster to the society and economy. In fact, the Government usually plays all these three roles and directly influences the whole society under different circumstances and periods of time. Therefore, the research of the functions of government in economy is always a complicated, interesting and ever-changing subject.The Foreign research of political connections originated in1980s. The various Scholars’study shows that the enterprise with government connections can have more easier accessibility to debt financing and lower rate of tax rate in the United States, Indonesia, Pakistan, Thailand, Malaysia, Brazil, and etc (Roberts,1990;2001; Adhikari, Fishman, Derashid and Zhang,2006; Charumilind et al.,2006; Mian and Khwajia2006; Claessens, Feijen and Laeven,2007). In fact, even in countries with highly developed market economy system, the Government is also an important external environment factors that should be considered by company, and has the closely related with the strategy of one company. For example:the government holds the related price mechanism of tax, subsidies and etc. Then change the enterprise’s cost and income structure by giving enterprise tax incentives or other way; The government encourages, restrictions, and bans the enterprise’s entry in certain industries through the legislation, and other means, thus to bring enterprise behavior change within the industry; The Government will use the enterprise resources in implementing the government itself such as GDP, employment, income and so on, by adjusting the macroeconomic regulation. As a country transitioned from planned economy system to market economy system, at present although the market economy is becoming a national economic dominant, the government’s influence still exists.In1972, the Watergate scandal pertaining to the companies’overseas bribery shady decision-making, in2001the Enron accounting information scandal, every time the blockbuster financial frauds are been disclosed, the audit committee have been pushed to the cutting edge of proving company management, improving the quality of the accounting information. It leads the audit committee to one of the hottest topics on theory and practice research from all over the world. In recent years, China attained the great achievements on economic development which based on the incomplete capital market establishing after "reform and open"..But information disclosure quality is the lifeline of the capital market, only high quality information can guarantee the capital market to operate effectively, and thus to protect the interests of the stakeholders and realize its social economy effectiveness.The audit committee system, as a kind of mechanism to strengthen the financial report process and internal control supervision, to support external auditors’independence so as to improve the information disclosure quality of the listed company, to ease the information asymmetry and to coordinate agency conflicts in capital market, are proved to be effective in developed countries such as Britain and America. Referred to Foreign company management experience, China in2002introduce the audit committee system in "Code of Corporate Governance for Listed Companies in China ", and in2008the importance of the audit committee system is addressed again in "the basic standards for Enterprise Internal Control".Throughout the domestic and foreign research on current political connections, they mainly focus on its corporate value, levels of performance, financing convenience and the effect of taxes level, but rarely research focuses on political connections’influence on the quality of the information disclosure. This paper, from the perspective of accounting research, based on the preliminary inquiry in the relations between political connections and corporate financial information disclosure quality with the Chinese economic and political system background, and united with the further research on the relationship if audit committee and information disclosure, further mines the interaction relationship among the political connections, audit committee characteristics and the information disclosure quality.By referring to present results from the domestic and foreign relevant literature, this paper is based on theoretical analysis of the political connections, the audit committee and information disclosure quality. First of all, the paper research on the political connections’influence on the information disclosure quality and audit committee quality in China. Then further research on whether the audit committee still functions well under the specific environment of political connections. To do the practical examination on the audit committee characteristics (like the ratio of the independent directors on committee, the ratio of the financial expert on committee, and the frequency of the meetings) has the vital influence on improving the information disclosure quality of listed company and the effectiveness of political connections’influence on the management of the audit committee characteristics, so as to provide the constructive suggestions on the constructions of the efficient audit committee.This paper is divided into seven parts:The first chapter is the introduction section. The introduction mainly includes two aspects of content, including the research background, research significance, the research content and research method. In a word it outlines the main purpose and structure.The second chapter is the literature review part. This chapter outlines the home and broad research literature about the relationship among political connections and information disclosure quality, audit committee characteristics and auditor feature, and information disclosure quality.The third chapter is the theoretical analysis part. This chapter is the theoretical basement of the whole article. It mainly introduces the theoretical basis about political connections, audit committee and information disclosure quality and provide the theory basis for the paper’s assumption.The fourth, fifth and sixth chapter is the research design and empirical analysis part and is the empirical study part of whole article. These chapters mainly introduce the research data sources, sample selection, research variables definition, research model construction and empirical analysis result. This part, first of all, put forward three research hypotheses based on the theoretical analysis. Then do the research on the sample data by using the empirical analysis model which is based on the theories from econometrics. Ultimately, analyze the data through STATA software to get the empirical analysis result.The seventh chapter is the research conclusion and future research direction. Initially, this chapter concludes the previous empirical analysis result. Then, provide some suggestions on the policy level. Finally, put forward the future research direction.This empirical study results show that compared to the listed companies without political connections, the listed companies with political connections perform poorer in information disclosure. By doing the empirical research on the relationship between the political connections and the audit committee characteristics, it finds that the companies’political connections and the companies’audit committee independence are positively related, but not significant; Political ties and the audit committee’s sense of profession are significantly negatively related; Political connections and the audit committee activity is inversely related, but not significant. Relative to the affiliation without political connections, the listed company with political connection has higher independence in audit committee, but its audit committee has lower professional and activity level. Further research on mutual relationship among political connection, the audit committee characteristics and the quality of the information disclosure found that political connection weakens the audit committee’s influence on information disclosure quality, but the audit committee still makes sense on improving the quality of information disclosure. So, the implementation of the audit committee system guarantees the information disclosure of the listed company. The paper also gets the following research result about the relationship between audit committee characteristics and information disclosure quality: the higher the audit committee’s professional, the higher the quality of the information disclose. The independence of the audit committee has the positively related to the information disclose quality, but not reach the significant requirement in statistics. The audit committee activity and information disclosure quality have a significant negative correlation.The main contributions: First of all, the paper sets up the empirical analysis model about political connection and information disclosure quality. Also provide new empirical evidence to understand the factors that influence the national capital market’s information disclosure quality. Secondly, the paper is the pioneer who includes the political connection, the audit committee characteristics and information disclosure quality into the same research framework, and provides the feasible ideas on understanding the interaction among these three factors and mining the factors that influence the information disclose quality. Finally, based on the empirical result, the paper put forward the constructive suggestions on constructing the high efficiency audit committee system.Limitations and future research direction:Because this paper only adopts the authority of the information disclosure rating in Shenzhen SE as a listed company information disclosure quality alternative variable, so the sample company are only comes from Shenzhen SE. The future direction of the research can consider to looking for more effective listed company information disclosure quality alternative variable, which comes from both Shenzhen and Shanghai SE. This paper, as common practice, uses the number of the board meeting to replace the audit committee meeting times as research activity variables which may not be reasonable enough. In addition, the standards made for the variable professional level of the audit committee need further improve.This paper stay consistent with most of the literature research in China which treat the top managers with political background as a symbol of the company with political connection, that is to say regard the board directors or general managers who are now or ever in office in government (the central government or local government) as the company with political connection. In fact, the top managers with government background are the only one side of political connection. Mara Faccio (2006) also regard the company’s big shareholders (refers to directly or indirectly holds10%of the voting shares) government background, their lineal relatives background or governmental people who has close relationship with the above as the political connection definition. Most foreign literature refers to Faccio’s definition of political connection. Subsequent research can consider to further dividing and defining the political connection, so as to reflect the company’s political connection more comprehensively. For example, divide the companies with political connection into3types:central government holding, local government holding and SASAC(State-owned Assets Supervision and Administration Commission); make division according to the executive level of managers promoted with different values, because the different level of office may related to the intensity of the political influence; Or divide the political connection into government officials’political connections and representatives’political connection.