Political uncertainty, institutions and accounting conservatism: evidence from the provincial leader turnover in China

Abstract

ABSTRACT The paper examines the effects of political uncertainty induced by the provincial leader turnover on accounting conservatism in China. We find that political uncertainty is significantly associated with reduced accounting conservatism using Basu model and C_SCORE measure developed by Khan and Watts. We further find that the negative effects are enhanced by institutional factors in China’s emerging economy: the effects are stronger in state-owned enterprises (SOEs), in regions with low marketisation index and in case the incoming leaders are from outside the province. In addition, we use the meetings of the National Congress of the Chinese Communist Party in 2002, 2007 and 2012 as an alternative measure of political uncertainty. The results show that the event of Congress meeting is significantly and negatively related to firm’s accounting conservatism and the results persist in provinces and areas with weak market institutions. By unfolding the relation between political uncertainty and accounting conservatism, our findings shed lights on how political environment can influence the accounting information properties and firms level disclosure behaviour.