A Study of Interaction Effects of Political Influences and Earnings Management on Organisational Performance

Abstract

The purpose of this paper is to analyse and comprehend the interaction effect of political influences and earnings management on organisational performance. This study investigates whether politically influenced firms use accrual-based earnings management activities to report poor organisational performance in Pakistani firms. By virtue of the current study, politically influenced firms are assumed to emerge through significant shareholding by the government, including but not limited to the presence of a politician(s), a close relative(s) of a politician(s), or a former/current civil/military bureaucrat(s) on the board. The study used a sample of non-financial listed firms in Pakistan over the period of 2009–2013. The panel corrected standard error (PCSE) technique was used to solve the heteroscedasticity issue. The results envisaged that politically influenced firms, through the presence of politicians and bureaucracy, manipulate earnings through accruals in order to report poor organisational performance but with less taxable income. The study implies an adverse relationship between politically influenced firms and organisational performance, pursuant to which the regulators must keep political factors in mind during regulatory reforms. This study contributes to the field of organisational performance and earnings management as it integrates agency theory with political economy theory. In addition, this study provides deep insight to policy makers who are interested in improving corporate governance in transnational economies.