Political Corruption and Firm Accounting Conservatism

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. This finding is robust to several endogeneity checks, including the propensity score matching method and an instrumental variable approach. We also find that firms in more corrupt areas bear greater political 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 corruption imposes great political costs on local firms, which induces them to adopt more conservative reporting strategies to shield their assets from expropriation by corrupt officials