High-level politically connected firms, corruption, and analyst forecast accuracy around the world

By Charles J. P. Chen, Yuan Ding, Chansog Kim. 2010

343 citations recorded by the source corpus.

The international business (IB) literature has widely recognized political forces as major factors that complicate the strategic decisions of multinational enterprises (MNEs). Analyses by financial intermediaries can help to reduce the risk of information asymmetry caused by such factors. Using firm-level data from 17 jurisdictions between 1997 and 2001, this study investigates the association between a firm's high-level political connections and earnings forecasts made by financial analysts, an important group of financial intermediaries. We find that, after controlling for other determinants of forecast accuracy, analysts experience greater difficulty in predicting the earnings of firms with political connections than those of firms with no such connections. However, in jurisdictions in which corruption level is relatively high, earnings forecast accuracy is influenced more by a firm's political connections. Our findings contribute to the IB literature by demonstrating that political connections exacerbate the information asymmetry between investors and managers, and also that anti-corruption measures can curb the adverse effect of political connections on the corporate information environment. These findings bear the practical implication that MNEs must consider political issues when making resource allocation decisions.

Subfields: Accounting, Strategy and Management

View Paper: https://www.semanticscholar.org/paper/2c069f555997a38c42c57dfa33000b2b8727afdb

How researchers see this paper

The researchers whose trusted networks rank it highest, strongest advocate first. Every researcher gets a different order.

In Accounting

In Strategy and Management

Citations in the corpus

Auditor Choice in Politically Connected Firms (2014, positive): “, 2011); analyst forecast coverage and accuracy (e.g., Lang et al., 2004, 2012; Chen et al., 2010); accounting standard choice (e.”
Sub‐National Institutional Contingencies, Network Positions, and IJV Partner Selection (2012, positive): “This index has been used extensively in finance and economics (Chen et al., 2011), and has recently been introduced to the management literature (Gao et al.”
Institutions and the performance of politically connected M&As (2013, methodology): “Measuring the Country-Level Institutional Environment Following prior studies (Chen et al., 2010; Faccio, 2006), we focus on the weakness of the legal system and the level of corruption.”
Human Capital and CEO Compensation during Institutional Transitions (2015, positive): “Yet, outside directors who serve on CCs often give in to the demands of CEOs for high compensation (Chen et al., 2010b).”
Political institutions, connectedness, and corporate risk-taking (2013, positive): “In an international study, Durnev and Fauver (2011) capture the multidimensional nature of state interference (including factors such as expropriation risk, degree of property rights, political constraints on policymakers, and corruption), and show that government predatory policies (e.”
Extending the internationalization process model: Increases and decreases of MNE commitment in emerging economies (2011, background): “This applies especially to foreign firms, which may learn later of government intentions to change, thus suffering from information asymmetries (Chen et al., 2010, Henisz, 2000).”