Cash Holdings, Political Connections, and Earnings Quality : Some Evidence from Malaysia

This study investigates the influence of cash holding, political connection and their interaction effect on earnings quality in the Malaysian environment, where political influence plays a vital role in many aspects of business dealings and resources allocation is seriously affected by politics. We extend prior studies on cash holdings and firm value by providing evidence that earnings of firms with excess cash reserves are of high quality. Consistent with previous research, we find that investors perceive earnings numbers of politically connected firms (PCFs) as being of low quality. However, our study fails to support our expectation that the adverse consequences of holding a large amount of cash to earnings quality would be more pronounced when political extraction is high. The findings of this study suggest that policy makers should encourage or mandate firms to disclose information in relation to their connections with government, political party, or politicians so that investors and all interested parties can use the information to better assess the firms' earnings quality