Politically Connected Firms and Earnings Informativeness in the Controlling Versus Minority Shareholders Context

June 3, 2013 Leave a comment

Politically Connected Firms and Earnings Informativeness in the Controlling Versus Minority Shareholders Context

Carolina Bona Sánchez University of Las Palmas de Gran Canaria

Jerónimo Pérez Alemán Universidad de Las Palmas de Gran Canaria

Domingo J. Santana Martin University of Las Palmas de Gran Canaria

May 25, 2013

Abstract: 
Research Question/Issue: Focusing on an environment where the principal agency conflict steams from the divergence of interests between dominant owners and minority shareholders, and where the legal system provides weak protection to external investors, we analyze the effect of firms’ political ties on earnings informativeness. We also address a question that has not been considered in previous research, namely, the impact of the level of divergence between the dominant owner’s voting and cash flow rights on earnings informativeness for politically connected firms.
Research Findings/Insights: We find that the presence of politicians on the board negatively affects earnings informativeness. We also find a positive impact of the divergence between the dominant owner’s voting and cash flow rights on the informativeness of accounting earnings in politically connected firms.
Theoretical/Academic Implications: We show that the relationship between political ties and earnings informativeness is explained by an information effect, whereby politicians and shareholders are interested in providing as little information to the market as possible. Additionally, we show that the positive relationship between divergence and earnings informativeness in politically connected firms is explained by an alignment effect, whereby the existence of political ties reduces the dominant owner’s incentive to expropriate minority shareholders’ wealth, thus increasing earnings informativeness.
Practitioner/Policy Implications: The results of our study may be useful for regulators interested in increasing transparency in order to promote a more efficient allocation of resources. Similarly, the results may be useful to investors, financial analysts and auditors, as they provide evidence of the importance of considering specific features of the corporate governance system when assessing the credibility of accounting information.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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