The Impact of Political Connection & Financial Misstatement on Agency Costs: Evidences from Political Agency Hypothesis
Subject Areas : Corporate governance
1 - Assistant Professor of Accounting Department, North Tehran branch, Islamic Azad University, Tehran, Iran
Keywords: political connections, Financial Reporting Misstatement, Agency Problems, Interest Conflict,
Abstract :
This paper assessed the impact of political connection and financial misstatement on agency costs especially in politically connected firms. Agency cost is measured using the ratio of operational expenses to operational sales revenues index. Also, politically governance affiliation in either board structure or ownership structure is considered as a proxy of political connection. In addition, managers' multi-period incentives to misstate earnings in financial reporting are based on accruals earnings management. Research population using screening method consists of 204 firms listed in Tehran Securities & Exchange over 10 years period during March 2013 to March 2023. Research hypotheses investigated through multivariate regression models using panel data with fixed effect and generalized least squares method by E.Views software. Empirical findings documented that political connected firms have high level of agency costs significantly. Also, more managerial incentives to misstate earnings in financial reporting lead to increase agency costs level significantly. In addition, high level of earnings misstatement in politically connected firms caused to upward the agency costs level; In fact, these events enhance the interest conflict resulting from agency problems. So, it is aligned to political agency hypothesis, according to which the managers in politically connected firms, provoke agency conflicts due to opportunistic motives and harmful consequences of political connection. Other findings showed that the level of financial reporting misstatement and agency costs in politically connected firms has a significant difference compared to firms without political connection. This indicates the harmful consequences of political connections in Iran.
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