Corporate political connections and earnings management in a unique regulatory setting: do audit quality and family control matter?

Abstract

Purpose This study aims to investigate the impact of corporate political connection (CPC), audit quality (AQ) and family control (FCON) on earnings management (EM) practices and to examines how audit quality and FCON moderate the association between CPC and EM within the context of an emerging economy. Design/methodology/approach Using a sample of 540 firm-years derived from 110 listed manufacturing firms in Bangladesh for the years 2018–2023, this study employed ordinary least squares regression to assess the associations. Findings The results indicate that politically connected firms employ lower accrual EM compared to non-connected firms in Bangladesh perhaps through the use of political ties to manage performance pressures. This relationship is significantly moderated by FCON, indicating that politically connected family firms exhibit higher earnings manipulation. Clients of Big 4 affiliated audit firms exhibit lower accruals manipulation when they have political connections compared to those without political ties. The tendency to apply reduced EM among connected firms holds only in firm years where firms have made positive earnings without manipulation. Research limitations/implications Contrary to the widely held view, the paper implies that politically connected firms, using political privileges, bypass some of the market pressures to manage earnings arising from managerial opportunism. Practical implications The study findings will provide investors with a better understanding of the earnings quality of the politically affiliated firms in emerging economies and help them make better investment decisions. Originality/value The paper is the first of its kind to show that political power may help businesses in some contexts to manage financial market pressures arising from earnings performance.