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Political Association, the Quality of Accounting Information and the Cost of Debt Financing

Author: QiWanXia
Tutor: ShuZuo
School: Southwestern University of Finance and Economics
Course: Accounting
Keywords: Political Association Accounting Information Quality DebtCovenants Debt Financing Costs
CLC: F275
Type: Master's thesis
Year: 2013
Downloads: 103
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Abstract


No matter in countries with economies in transition or developed market economy countries, the government owns a monopoly on the allocation of many social resources. For this reason, the companies are hoping to establish relations with the government, which has been a universal phenomenon in the development of countries (Faccio,2006). The enterprises always expect to be able to benefit from the government’s allocation of rights by maintaining good relations with government, so that they can occupy a competitive advantage. The history of securities market is short, and now it is experiencing the reality of economic transition, the legal regulatory mechanisms need to be improved, the government, as "the visible hand", is still playing a very important role in the market economy, which makes the demand for the establishment of a political association of business and government is more intense.Because many political associations come mainly from company executives or major shareholders, the political associated enterprises may face more serious agency problems, the shelter effects of political relations can reduce the cost caused by the lower accounting information quality. Bushman et al.(2004) found that the state-owned shares would undermine the transparency of information. Guedhami et al (2008) shows that politicians have strong motivation to hide the behavior of transferring company resources in political purposes, which results in lower accounting transparency requirements for state-owned enterprises. Because of the presence of the political background, Due to the presence of the political background, the political association managers of listed companies have low sensitivity to market pressure to improve the quality of accounting information. They can reduce or avoid punishment caused by the low quality of financial reporting with political association to (Lei Guangyong,2009). So does this mean political associate companies will have low accounting information quality? Accounting information reflects a company’s financial situation and operating results, which is very important for creditors to measure and evaluate corporate solvency as well as the basis of debt covenants. The level of accounting information quality determines the cost of debt financing to a large extent. Francis et al (2005) found that, the worse the quality of accounting information, the higher the cost of debt financing for the quality for the U.S. companies. In the reality of economic transition in China, the main context of this study is how political association will affect the quality of accounting information and whether it will reduce the role of accounting information quality in debt covenants, so that companies can get favorable debt financing costs.The first thing we have to do is the clear definition of political association and evaluation of accounting information quality. On the basis of the relevant researches, with the combination of the actual situation in China, we defined political association as:If one large shareholder or managers (include (Vice) chairman,(vice) president,(vice) general manager, deputy general manager and CEO) now or used to be in government service, or served as NPC deputies and CPPCC members, the company has political association. Then, this article seeks to explore a simple and operability indicators to measure the accounting information quality instead of discretionary accruals profits, and the difference between nominal profitability and actual profitability is used in this paper. The nominal profitability refers to net profit, and the actual earnings refer to its operating activities net cash flow. In fact, the real profit of a company is the profit that can bring cash flow profit in cash basis of accounting principle, while accrual basis separate the realized profit and cash flow of a company, which leads to the net profit is book value instead of the real profitability. The operability accruals generate from accrual basis, so the paper compares the net profit and the net cash in operating activities, the difference is used to measure the accounting information quality.In addition, the article also compares the different effect on information quality of different levels of political association, as well as in different types of enterprises (state-holding and non-state-owned holding).Finally, the article analyzes the empirical results and make appropriate policy recommendations.This article is divided into five parts, the detailed introduction as follows:Chapter One:Introduction.In this part, the back ground and significance of this paper are introduced, and according to the determined purpose, points out the content and research framework as well as points out the innovation.Chapter Two:Literature Review. In this chapter, the relevant researches and papers are reviewed, including the definition of political association, its measurement and influential factors, the impacts on corporate governance and accounting information of political association. This chapter is not only a review, but gives a brief evaluation of the researches, it is the validation whether it has the feasibility and innovative or not.Chapter Three:Theoretical analysis and research hypotheses. This chapter first theoretical analyzes political association, accounting information quality and debt covenants. And put forward five hypotheses on the basis of the theoretical analysis.Chapter Four:Research design and empirical results analysis. This chapter first makes research design and empirical models to examine the hypotheses. We do the descriptive statistics for each variable of the sample company. Then, multiple linear regression the relationship between test for explain variables and explanatory variables as well as control variables.Chapter Five:Conclusions and Suggestions. This chapter firstly makes conclusions on the basis of theoretical and empirical results. Then put forward some relevant suggestions. Last part is the innovation and limitation of the research.The innovation of this paper is mainly reflected as follows:First of all, the article topics and research perspective, the political association as domestic hot research topics in recent years, to explore the impact on corporate governance has theoretical and practical significance. This article starts from accounting information quality and debt financing costs perspectives, examines the impact on accounting information and the role of accounting information quality in debt covenants.Secondly, research methods, the previous researches usually used discretionary accruals profits to measure the accounting information quality, but the process to separate the operability accruals and discretionary accruals. This article first used the difference between the net income and cash flows of operating activities (Recorded as GPANA). The greater the difference between these two indictors, the accounting information quality is better, and vice versa.Thirdly, because of special economic development in China, a hierarchical administrative decentralization framework is formed. At local governments at all levels, there exists a similar agency relationship. Compared with the lower levels of government, the higher levels of government will be more likely to restrain their own behavior to safeguard their own public impression. So there are some different impacts on the accounting information among the different levels of political association. According to object of the enterprises to establish the political contact, the article divides the political association into five levels, which are central, provincial, municipal, other local political association and non-political association enterprise, and then makes the further research.

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