High-Level Politically Connected Firms, Corruption, and Analyst Forecast Accuracy Around the World

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SSCI Scopus FT ABDC-A*

Abstract

The　international　business　(IB)　literature　has　widely　recognized　political　forces　as　major　factors　that　complicate　the　strategic　decisions　of　multinational　enterprises　(MNE).　Analyses　by　financial　intermediaries　can　help　to　reduce　the　risk　of　information　asymmetry　caused　by　such　factors.　Using　firm-level　data　from　17　jurisdictions　between　1997　and　2001,　this　study　investigates　the　association　between　a　firm＇s　high-level　political　connections　and　earnings　forecasts　made　by　financial　analysts,　an　important　group　of　financial　intermediaries.　We　find　that,　after　controlling　for　other　determinants　of　forecast　accuracy,　analysts　experience　greater　difficulty　in　predicting　the　earnings　of　firms　with　political　connections　than　those　of　firms　with　no　such　connections.　However,　in　jurisdictions　in　which　corruption　level　is　relatively　high,　earnings　forecast　accuracy　is　influenced　more　by　a　firm＇s　political　connections.　Our　findings　contribute　to　the　IB　literature　by　demonstrating　that　political　connections　exacerbate　the　information　asymmetry　between　investors　and　managers,　and　also　that　anti-corruption　measures　can　curb　the　adverse　effect　of　political　connections　on　the　corporate　information　environment.　These　findings　bear　the　practical　implication　that　MNEs　must　consider　political　issues　when　making　resource　allocation　decisions.　[PUBLICATION　ABSTRACT]

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