Political Corruption and Accounting Conservatism

Abstract

We investigate how local political corruption shapes corporate financial reporting conservatism. Using a large sample of U.S. public firms, we find that firms located in areas with higher levels of political corruption tend to adopt greater accounting conservatism. We also find that firms in more corrupt areas bear greater political expropriation costs. Further analysis reveals that the positive effect of corruption on conservatism is stronger for firms with less bargaining power against corrupt officials, firms with lower public visibility, and firms with weaker dependence on the government for sales. Overall, our findings support the expropriation hypothesis that corrupt officials have incentives to expropriate resources from local firms, which induces them to adopt more conservative reporting strategies to shield their assets.

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