Political Connections and Readability of Financial Statements: Evidence from China

Abstract

High-quality information disclosure improves the accuracy of investors’ judgment and efficiency in resource allocation. With a focus on the readability of information disclosed, this study analyzes how political connections affect the readability of financial statements by taking A-share private-owned companies listed on Shanghai and Shenzhen Stock Exchanges as research sample from 2008 to 2019. We use ordinary least squares model and moderating effect model as our main methodology. A series of robustness tests are also carried out. Our research finds that companies with political connections are more likely to issue less readable financial statements. This negative impact is diminished for the firms with a higher marketization level, better corporate governance, and greater analyst coverage. Further research on the economic consequences demonstrates that political connections would weaken the positive effect of the readability of financial statements on the firm’s future market value. This study enriches the research on the factors influencing the readability of financial statements and reveals the economic consequences of political connections in terms of textual information disclosure quality. It is therefore an important reference for regulatory authorities to formulate guidelines on text information disclosure and supervise the compliance of politically affiliated enterprises, while facilitating listed companies to enhance the readability of their financial statements.

Keywords

• Political connections
• Readability of financial statements
• Text analysis
• Information disclosure
• Corporate governance