China's Private Listed Company Executive Government Background And Surplus Quality Research

Since political connection becomes a hot topic in international literature in the past decade, in this paper we want to investigate the relationship between political connections and earnings equality. In particular, research methods based on political connections of top managers are widely used in this field. Economic explanations for poor earnings quality typically focus on agency and governance issues. Few studies examine how earnings quality varies with political connections in political connected firms. In the context of China, which has particular economic and political systems, it is very important to study the impact of political connections on the accounting properties of firms, especially earnings quality.In China, domestic studies leave open the question whether political connections improve or lower earnings quality. So, in this paper we want to fill the gaps in this area in China. We focus on the private firms and choose two dimensions of earnings quality to investigate how the political connections of chairman of the board or CEO influence the earnings quality of the private listed firms. Based on the sample of Chinese A-share private listed firms during2008and2010, we find that other things being equal, earnings quality in private listed firms with political connections is poorer than that of similar non-connected peers.Based on this, we go on testing the impacts of different political connections on earnings quality. First, we divide political connections of top managers into central political connections and local political connections, and find that private listed firms with local political connected top managers have poorer earnings quality than those with central political connected top managers. Second, we distinguish the "government officials" connections and "members of People’s Congress (PC) and Chinese People’s Political Consultative Conference (CPPCC)" connections, and find that "members of PC and CPPCC" connections reduce earnings quality, whereas "government officials" connections have no significant effect on earnings quality.In addition, we also find that the less development the locations, the more severe the local governments’intervention, the more negative effect of the local government connections on the earnings quality of the private listed firms. Our research will not only enrich and expand the study of political connections of private listed firms in China, but also enlarge earnings quality research by exploring a new area of political connections. We also show some evidence for the negative impact of political connections on firm values.