POLITICALLY-CONNECTED FIRMS:

ARE THEY CONNECTED TO

EARNINGS OPACITY?

Ahmed Riahi-Belkaoui

ABSTRACT
This paper is an investigation of the relationship between earnings opacity
in 32 countries and elements of the political order. What the picture shows is
a clear manifestation of earnings opacity internationally. What is interesting
with this picture is the findings that earnings opacity is positively related to
the percentage of politically connected listed firms and negatively related to
the connected firms as a percentage of market capitalization and the degree
of law enforcement. What is puzzling with this picture is the findings that the
level of disclosure, the number of auditors per 100,000 inhabitants, and the
adoption of International Accounting Standards (as elements of the account-
ing order) are not significantly related to earnings opacity internationally.
It is the political climate rather than the technical accounting climate that
is at the core of accounting quality in general and earnings opacity in
particular.

1. INTRODUCTION
Earnings opacity is a measure that reflects how little information there is in a
firm’s earnings number about its true, but unobservable, economic performance

Research in Accounting Regulation

Research in Accounting Regulation, Volume 17, 25–38
Copyright © 2004 by Elsevier Ltd.
All rights of reproduction in any form reserved
ISSN: 1052-0457/doi:10.1016/S1052-0457(04)17002-1
25
26 AHMED RIAHI-BELKAOUI

(Bhattacharya, Daouk & Welker, 2003).1 Both anecdotal and empirical evidence
point to international differences in earnings opacity with serious implications for
equity and other markets (Bhattacharya et al., 2003; Bushman & Smith, 2001;
Leuz, Nanda & Wysocki, 2001). While earnings opacity may just be viewed as a
technical accounting matter, its excesses may be corrected by the enforcement of
laws. This calls for two possibilities:
(a) Where the enforcement laws may not work effectively, as in the case of
political connectedness of firms that benefit from government-created rents
and protection. In this case of political connectedness, management may feel
more empowered to be aggressive in their choices of accounting methods
leading to a higher level of earnings opacity.
(b) Where the enforcement of laws may work even with instances of political
connectedness as in the presence of market discipline. Where the percentage
of market capitalization of connected firms is high, a lower level of earnings
opacity may be expected, as better accounting quality may be required by
market participants.
Accordingly, the goal of this paper is to test the relationships between earnings
opacity on one hand and political connectedness, market capitalization of
connected firms, and degree of law enforcement on the other hand. The results of
empirical study on data from 32 countries indicate that: (a) the level of earnings
opacity is positively related to the percentage of politically connected listed
firms; and (b) negatively related to both the percentage of market capitalization of
connected firms and the degree of law enforcement in the country. An expansion
of the model to test the impact of accounting order indicates that earnings opacity
was not significantly related to the level of disclosure, the number of auditors per
100,000 inhabitants and the adoption of international accounting standards. The
remainder of the paper is organized as follows. Section 2 presents an earnings
opacity model contingent on political, market and legal factors. Section 3 discusses
the sample, data estimation, and presents summary statistics and correlations.
Section 4 presents and discusses the results of the determinants of earnings
opacity internationally. Section 5 discusses the robustness of the results, and
Section 6 concludes.

2. EARNINGS OPACITY MODEL

The political analyses of accounting (e.g. Arnold, 1991; Miller, 1990) argue that the
technical and political aspects of accounting are intricately linked in the sense that
the technical cannot be studied by neglecting the political (Burchell et al., 1980;
Politically-Connected Firms 27

Fig. 1. Determinants of Earnings Opacity Internationally.

Stulz & Williamson, 2001). In the context of this study, the technical is expressed
by earnings opacity and it can only be studied in the total political context. It
results from a contingency theory of accounting that argues that accounting and
its phenomenon are a function of its environment in general and the political
environment in particular (Gernon & Wallace, 1995; Wallace & Gernon, 1991).
Applied to the context of this study, earnings opacity arises essentially from the
political culture and environment in a particular country. Figure 1 indicates the
hypothesized relationships between earnings opacity and the main characteristics
of the political environment. The political environment is depicted by: (a) the
percentage of politically connected firms; (b) the connected firms as percentage
of market capitalization; and (c) the degree of law enforcement. Each of these
relationships is explicated as follows:
(1) The model posits a positive relationship between earnings opacity and
the percentage of politically connected firms in a given country. Political
connectedness of a firm is generally defined by the fact that a large shareholder
(holding at least 10% of the votes) or top directors (i.e. CEO, president,
vice-president or secretary) is a member of parliament, a minister (including
the Prime minister) or the Chief of the State (i.e. dictator, president, King or
28 AHMED RIAHI-BELKAOUI

Queen), or is “closely-related” to a top politician (Faccio, 2002). The situation,

known as “crony capitalism,” implies that the dominant political leaders use
their power to the advantages of their families and friends, individuals or
firms, who benefit from government-created rents. It amounts to a form of
capitalism in which politicians channel resources toward favored and con-
nected firms, distorting incentives, misallocating investments, and increasing
the extend of corruption (Shleifer & Vishny, 1994). The significance of the
benefits extracted by connected firms is supported both in U.S. (i.e. Agrawal
& Knoeber, 2001; Ang & Boyer, 2000; Kroszner & Stratmann, 1998; Roberts,
1990) and abroad (Fishman, 2001; Hellman, Jones & Kaufmann, 2000;
Johnson & Mitton, 2002). Faccio (2002) finds that connected companies
enjoy easier access to debt financing, lower taxation and stronger market
power. However, in spite of these significant benefits, Faccio (2002) finds that
connected firms underperform their peers on an ex-ante basis. The end result
of this situation is the potential for more aggressive opportunism from man-
agers of politically connected firms in the form of shirking and sharking (Orts,
1958), and managerial rent-seeking (Edlin & Stiglitz, 1997; Shauer, 2000).
The increase in opportunism has also important economic consequences
(Gaballero & Hammom, 1998). To camouflage their bad performance and
feeling empowered by their political connectedness, managers will likely
resort to more alternations of firms’ reported economic performance leading
to an increase in earnings opacity.
(2) The model posits a negative relationship between the connected firms as a
percentage of market capitalization and the level of earnings opacity. The
principal-agent conflict between the firm’s insiders and its outside investors
suggests that insiders are more inclined to mask firm performance to minimize
outsider and/or legal intervention and/or to present a financial picture that can
be deemed as financially attractive by outsiders. This “camouflage” activity
is at the essence of the concepts and techniques of earnings opacity. The main
private gain is the weakening of outsiders’ ability to monitor and discipline
insiders as a result of information asymmetries between insiders and outsiders
created by earnings opacity. The only resources left to outsiders are to: (a)
write contracts that confer them rights to discipline insiders (e.g. to replace
managers); and/or (b) to vote with their feet and reinvest their capital on less
earnings management prone firms. Both actions are more likely to depend on
the level of market capitalization. Firms in general, and politically connected
firms in particular are more likely to be scrutinized by outsiders on all aspects
of their activities, including the level of accounting quality they provide. One
may argue that earnings opacity will be more widespread in countries where
the politically connected firms have a low market capitalization.
Politically-Connected Firms 29

(3) The model posits a negative relationship between the degree of law en-
forcement and earnings opacity. The degree of law enforcement was first
seen as comprising three fundamental characteristics: (a) the supremacy of
regular law as opposed to arbitrary power, i.e. the rule of law, not men; (b)
equality before the law of all persons and classes, including government
officials; and (c) the incorporation of constitutional law as a binding part
of the ordinary law of the land (Dicey, 1915).2 Law enforcement requires
that individuals and firms be able to practically conform their behavior
to the laws. Therefore, managers of firms, including politically connected
firms, feel the legal pressure to present information compatible with the law
and degree of law enforcement. The higher the degree of law enforcement,
the less likely managers will resort to opportunistic choices of accounting
techniques, resulting in lower level of earnings opacity. The prediction in this
study is that the degree of law enforcement predisposes to a lower level of
earnings opacity.

3. SAMPLE AND DATA ISSUES

3.1. Sample

The determination of the sample rested on securing the necessary data in the
variables of interest as specified by the earnings opacity model in Fig. 1. A total
of 32 countries met this test. They are shown in Table 1. The dependent variable
of earnings opacity as well as the independent variables of: (a) percentage of
politically connected firms; (b) percentage of market capitalization of connected
firms; and (c) degree of law enforcement are explicated next.

3.2. Measures of Earnings Opacity

The quality of accounting in a given country is measured by three dimensions

of earnings opacity – earnings aggressiveness, loss avoidance, and earnings
smoothing – where opacity is viewed as a complex interaction between the three
factors of managerial motivation, accounting standards and the enforcement
of accounting standards (audit quality) (Bhattacharya et al., 2003). In brief,
earnings are opaque because of: (a) the motivation of managers to manipulate
earnings; (b) the accounting standards are either loose or just bad; and (c) the
enforcement is lax. The three measures of earnings opacity derived from the study
by Bhattacharya et al. (2003) are explicated and measured as follows:
30 AHMED RIAHI-BELKAOUI

Table 1. Data Used.

Name of Country OEO EAG LA ES PCLF DLE CFMC

Australia 4.9487 6.0769 4.0769 4.6923 0.70 10.00 0.32

Austria 5.4537 4.5833 6.0833 5.6944 0.91 10.00 0.25
Belgium 3.8547 2.0769 5.0769 4.4102 3.82 10.00 18.77
Brazil 4.9583 6.8750 3.6250 4.3750 0.00 6.32 0.00
Canada 4.8034 4.6154 5.3076 4.4871 1.31 10.00 2.53
Chile 6.9333 6.6000 7.2000 7.0000 2.25 7.02 1.43
Denmark 4.7878 4.0909 4.9090 5.3636 3.07 10.00 2.52
Finland 5.5726 4.3846 6.6923 5.6410 1.52 10.00 0.14
France 4.5726 4.1538 4.9230 4.6410 2.19 8.98 8.03
Germany 5.0769 3.4615 6.3076 5.4615 1.55 9.23 1.20
Greece 8.0000 8.8889 7.2222 7.8888 0.65 6.18 0.09
Hong Kong 6.2500 7.3333 5.4166 6.0000 1.98 8.22 2.33
India 7.6825 8.2857 7.7142 7.0476 2.79 4.17 1.83
Indonesia 7.7142 8.0000 8.0000 7.1428 22.08 3.98 12.76
Ireland 5.5213 5.9231 4.8461 5.7948 2.44 3.98 22.83
Italy 6.0427 5.2308 6.3076 6.5897 10.30 8.39 11.27
Japan 6.7265 6.6154 6.6153 6.9487 1.34 8.57 1.34
Korea 7.1305 7.9000 6.2000 7.2916 2.56 5.35 8.95
Malaysia 6.8205 7.6923 6.2307 6.5384 19.78 7.80 27.24
Mexico 5.0493 6.8889 3.7777 4.4814 8.51 6.78 8.14
Netherlands 4.8119 3.3077 5.6153 5.5128 0.42 10.00 0.01
Norway 4.4545 4.7273 4.6363 4.0000 0.00 10.00 0.00
Portugal 3.5555 1.5000 5.1666 4.0000 2.97 8.98 2.00
Singapore 6.1481 6.2222 6.1111 6.1111 7.86 8.68 2.59
South Africa 6.2906 6.6923 5.9230 6.2564 0.00 4.42 0.00
Spain 5.2020 4.1818 6.3636 5.0606 1.50 7.80 0.82
Sweden 5.5213 6.0769 5.0769 5.4102 1.07 10.00 1.02
Switzerland 5.2906 3.9231 6.5384 5.4102 2.47 10.00 0.69
Thailand 6.0000 4.7143 7.5714 5.7142 15.05 6.25 41.62
Turkey 7.8518 10.0000 7.3333 6.2222 1.19 5.18 0.14
U.K. 5.0769 5.2308 4.9230 5.0769 7.17 8.57 39.02
USA 4.0170 4.0769 4.4615 3.5128 0.20 10.00 4.94

Note: EAG = Earnings aggressiveness (Bhattacharya et al., 2001). LA = Loss avoidance (Bhattacharya
et al., 2001). ES = Earnings smoothiness (Bhattacharya et al., 2001). OEO = Average of EAG,
LA, and ES (Bhattacharya et al., 2001). DLE = Degree of law enforcement measured by a “Rule
of Law” score (La Porta et al., 1997) and represents the legal environment in each country. PCLF
= Percentage of politically connected listed firms (Faccio, 2002). CFMC = Connected firms as
percent of market capitalization (Faccio, 2002).

(A) Earnings aggressiveness, the opposite of accounting conservatism, results

from the tendency of managers to increase reported earnings numbers. To
understand these managerial motivations, see for example, Rangan (1998),
Teoh et a1. (1998), Shivakumar (2000), Healy (1985) and Barth et al. (1999).
Politically-Connected Firms 31

It is expected to be positively related to earnings opacity, as it is the tendency to

delay the realization of losses and speed the realization of gains. It is measured
at a point in time as the median for country i, year t, of accruals divided by
lagged assets.3 Scaled accruals are defined as:

ACCkt = (
CAkt −
CLkt −
CASHkt +
STDkt − DEPkt

+
TPkt )TAkt−1

ACCkt = Scaled accruals for firm k, year t

CAkt = Change in total current assets for firm k, year t

CLkt = Change in total current liabilities for firm k, year t

CASHkt = Change in cash for firm k, year t

STDkt = Change in current portion of long-term debt included in total
current liabilities for firm k, year t
DEPkt = Depreciation and amortization expenses for firm k, year t

TPkt = Change in income taxes payable for firm k, year t
TAkt−1 = Total assets for firm k, year t − 1
The higher the median observation of scaled accruals of country i in year t,
the higher is the earnings aggressiveness in country i in year t.
(B) Loss avoidance behavior is the second measure of earnings opacity following
evidence that U.S. firms engage in earnings management to avoid reporting
negative earnings (Burgstahler & Dichev, 1997; Degeorge et al., 1999; Hayn,
1995). It is measured by the ratio of the number of firms with small positive
earnings minus the number of firms with small negative earnings divided by
their sum. The higher this ratio for country i in year t, the higher is the loss
avoidance in country i, year t.
(C) Earnings smoothing is the third measure of earnings opacity as artificially
smoothed earnings fail to depict the swings in underlying firm performance
and increase earnings opacity. It is measured by the cross-sectional correlation
between the change in accruals and the change in cash flows, both scaled by
lagged total assets, in country i, year t. The lower this correlation in country
i in year t, the higher is the earnings smoothing in country i, year t.

Bhattacharya et al. (2003) computed these three measures of earnings opacity for
a sample of 34 countries for the year 1985 through 1998 using variables from
Worldscope. They are shown in Table 1. Only 32 countries from the original
sample are used in this study based on the availability of data on the independent
variables. An average of the three measures is used in this study as a measure
of the earnings opacity and accounting quality for each country. The higher the
value of this variable, the higher is the degree of earnings opacity.
32 AHMED RIAHI-BELKAOUI

3.3. Measure of Connectedness and Law Enforcement

The measures of connectedness were taken from a study by Faccio (2002). He

identified 17,033 names of top directors of 19,844 listed companies covered in
world scope as well as those of major shareholders. Overall, 532 firms (2.68% of
all listed corporations) were found to be politically linked, representing 7.76% of
the world’s market capitalization. Two variables are used to measure the diffusion
of political connections at the country level. The first, “percent of politically
connected listed firms,” is the ratio of connected firms over the total number of
firms listed in a particular country. The second measure, “connected firms as
percent of market capitalization” is the ratio of market capitalization of connected
firms over the overall capitalization of each country. Both variables are shown in
Table 1.
The degree of law enforcement is measured by the law enforcement index
provided in La Porta et al. (1997). Constructed on the basis of a survey of
investors, this index estimates the quality of the rule of law in a country. As
reported in Table 1, the degree of law enforcement index ranges from 3.98 to 10
in one sample (with 10 indicating best quality of rule of law).4

3.4. Summary Statistics and Correlations

Table 1 includes the data for the dependent and independent variables used. The
earnings quality, as measured by the overall measure of earnings opacity, is the best
for Belgium and Portugal followed by the USA and Norway. The worst countries
in the sample for earnings quality are Turkey and Korea followed by Indonesia.
The best countries in terms of lower percentage of politically connected firms are
Brazil, Norway and South Africa. The worst countries in terms of higher percentage
of politically connected firms are Indonesia, Thailand, Malaysia and Italy. Table 2
presents the descriptive statistics for the main variables in the study while Table 3
presents the Pearson correlations among the same variables.

Table 2. Descriptive Statistics.a

Variables N Mean Std. Dev. Minimum Maximum

OEO 32 5.7429 1.1711 3.5555 8.000

PCLF 32 3.7210 5.2841 0.0000 22.080
CFMC 32 6.7327 10.6528 0.0000 41.620
DLE 32 7.6886 2.3299 2.7300 10.000
a Variables are defined in Table 1.
Politically-Connected Firms 33

Table 3. Pearson Correlations.a

OEO PCLF CFMC DLE

OEO 1.000 0.307 (0.087) 0.001 (0.994) −0.656 (0.0001)

PCLF 1.000 0.648 (0.080) −0.259 (0.132)
CFMC 1.000 −0.236 (0.171)
DLE 1.000
a Variables are defined in Table 1.

4. DETERMINANTS OF EARNINGS
OPACITY INTERNATIONALLY
To determine the impact of political connectedness, market capitalization of con-
nected firms and degree of law enforcement on earnings opacity internationally,
the following regression was used:
OEOi = ␣0 + ␣1 PCLFi + ␣2 CFMCi + ␣3 DLEi + U i
where
OEOi = Overall earnings opacity measure for country i (obtained from
Bhattacharya et al., 2003)
PCLFi = percentage of politically connected listed firms (obtained from
Faccio, 2002)
CFMCi = Connected firms as percentage of market capitalization (obtained
from Faccio, 2002)
DLEi = Degree of law enforcement (La Porta et al., 1997)

Table 4, column 1, presents results on the impact of the selected variables on

earnings opacity. The results and discussions are presented as follows:
(1) The impact of the percentage of connected listed firms is positive and
significant level (t = 2.01, p = 0.05). This is in conformity with our thesis
that the high level of political connectedness leads to more managerial
opportunism in general and an increase in earnings opacity. Managers of
politically connected firms feel more empowered to hide their rent-seeking
activities and henceforth the level of earnings opacity.
(2) The impact of the connected firms as a percentage of total market capitaliza-
tion is negative and significant (t = −0.037, p = 0.05). This is in line with a
“diversion” thesis whereby insiders are more inclined to provide better quality
accounting and less earnings opacity, as the likelihood of outsiders scrutinizing
their activities is higher with high market capitalization of the connected firms.
34 AHMED RIAHI-BELKAOUI

Table 4. Determinants of Earnings Opacity.

Independent Variables Dependent Variable: OEO (Overall Earnings Opacity)
1 2

Intercept 8.640 (13.05)* 6.017 (2.90)*

PCLF 0.072 (2.01)** 0.119 (2.32)**
CFMC −0.037 (−2.15)** −0.045 (−2.59)*
DLE −0.373 (−4.96)* −0.309 (−3.18)*
GL – 0.429 (0.84)
RGDP – 0.113 (0.98)
AU – −0.002 (−1.28)
DISC – 0.025 (0.93)
IAS – −0.501 (−1.52)
R2 (Adjusted) 50.40% 52.51%
F 11.50* 4.18*
Wald test 0.01 0.01
Reset F-value 0.05 0.05
Hausman F-value 9.35* 4.06*

Note: Variables such as PCLF, CFMC, and DLE one defined in Table 1. Other variables are defined
as follows: CL: Legal system with 1 for common law and 0 for civil law countries; RGDP: Ten
year GDP growth; AU: Number of auditors per 100,000 inhabitants; DISC: Financial disclosure
level; IAS: International accounting standards use.
∗ Significant at ␣ = 0.01.
∗∗ Significant at ␣ = 0.05.

(3) The impact of the degree of law enforcement is negative and significant
(t = −4.96, p = 0.01). This is very much in line with the thesis that the
higher degree of law enforcement and the implied penalties for failing to
meet the legal requirements predispose to a lower level of earnings opacity.

5. SENSITIVITY ANALYSIS

The model is expanded to investigate the potential impact of accounting order. The
accounting order is measured by the following three variables:

(a) The relative number of auditors as a proxy for the demand for auditing
discipline. It is measured by the auditors per 100,000 population from
Saudagaran and Diga (1997, Table 6, p. 51). The original source is the
International Federation of Accountants (IFAC, 8/13/1996).
(b) The amount of financial disclosure in a country as a proxy for accounting
transparency. It is measured by the disclosure level from the Center for
Politically-Connected Firms 35

International Financial Analysis and Research (CIFAR, 1995). The higher

the number more is the disclosure.
(c) The adoption of International Accounting Standards (IAS) as a proxy for
demand for international accounting harmonization. It is measured by the
IAS use (IASC, Insight, dated October 1997). Three dummy variables were
used as follows:

0: For completely independent standard setting and no use of IAS except
for comparison with IAS.

1: Separate accounting standards that are based on and similar to IAS in
most cases.

2: IAS are used as national standards with some modifications for local
conditions. Standards not covered by IAS are added.

The model is also expanded by adding a dummy variable for the legal system
(common law 1; civil law 0) and economic growth measured by the real growth
of GDP for 10 years.
The results of the expanded model in column 2 of Table 4 show that all the new
variables added were insignificant and did not contribute to the original model.
It seems that the manifestation of opportunistic use of accounting techniques,
resulting in the level of earnings opacity observed is independent of the quality
of accounting order, the nature of the legal system and the economic growth
rate.
The results of Table 4 rely on White’s (1980) adjusted standard error estimates
to deal with heteroscedasticity. The Wald test for joint significance is reported in
the table. In addition, for the three regressions used, there is no evidence of serious
multicollinearity among the independent variables. The RESET (regression
specification error test) as suggested by Ramsey (1969) and Thursby (1981, 1985)
and the Hausman test (1978), as suggested by Wu (1973) and Hausman (1978),
were used as specification tests. The result of the RESET test, used to check for
omitted variables, incorrect functional form, and non-independence of regressors,
show that the models used in this study are not mispecified (see diagnostic check
statistics in Table 4).

6. CONCLUSIONS

An investigation of the determinants of earnings opacity in 32 countries yielded

unexpected results. First, elements of accounting order do not seem to affect
earnings opacity. It is the political context rather than the technical that explicates
better the level of accounting quality in general and the level of earnings opacity
36 AHMED RIAHI-BELKAOUI

in particular in a given country. Second, earnings opacity is higher as a result

of political connectedness of firms and lower as a result of a high degree of law
enforcement and market capitalization of connected firms. What appears from
the second results is that creating a culture based on law enforcement and market
discipline is conducive to demand for more accountability and high quality of
accounting. However, the constraints created by political connectedness are more
conducive to the supply of less accountability and lower quality of accounting.
The answer to the problem of the quality of accounting internationally rests more
with creating the “right” morals of a political society, than with toying with the
limited technical discourse rituals offered by accounting.

NOTES
1. This view of earnings opacity is the opposite of earnings transparency, defined as the
timely incorporation of (unobservable) economic income into accounting earnings (Ball,
Kothari & Robin, 2000).
2. The core and traditional definition of rule of law in the U.S. still contains three
basic values or concepts: (1) constitutionalism; (2) rule-based decision making; and (3) a
commitment to neutral principles, such as federalism, separation of powers and textualism.
3. Teoh and Wong (2002) present some indirect evidence that scaled accruals affect
earnings opacity by affecting analysts’ forecast errors.
4. The law enforcement index used was found to be correlated with the “efficiency of
the judicial system” score provided by La Porta et al. (1998), the law and order indicator
provided by the International Country Risk Guide (ICRG), and the level of litigiousness
in a country from Wingate (1997). The Pearson correlations of the law enforcement index
used in the study with the three other legal enforcement indexes described earlier are high,
ranging from 0.4632 to 0.6931.

ACKNOWLEDGMENT
The author appreciates the valuable research assistance of Vijay Kamdar.

REFERENCES
Agrawal, A., & Knoeber, C. R. (2001). Do some outside directors play a political role? Journal of
Law and Economics, 44, 179–198.
Ang, J., & Boyer, C. M. (2000). Finance and politics: Special interest group influence during the
nationalization and privatization of Conrail. Working Paper, Florida State University.
Arnold, P. J. (1991). Accounting and the state: Consequences of merger and acquisition accounting in
the U.S. hospital industry. Accounting, Organizations and Society, 16(2), 121–140.
Politically-Connected Firms 37

Ball, R., Kothari, S. P., & Robin, A. (2000). The effect of international institutional factors on
properties of accounting earnings. Journal of Accounting and Economics, 29, 1–51.
Barth, M. E., Elliot, J. A., & Finn, M. W. (1999). Market rewards associated with patterns of accounting
earnings. Journal of Accounting Research, 37, 387–413.
Bhattacharya, U., Daouk, H., & Welker, M. (2001). The world price of earnings opacity. Working
Paper, Queens University, Kingston, Ont., Canada.
Bhattacharya, U., Daouk, H., & Welker, M. (2003). The world price of earnings opacity. The
Accounting Review, 3, 641–678.
Burchell, S., Clubb, C., Hopwood, A., Hughes, J., & Nahapiet, J. (1980). The roles of accounting in
organizations and society. Accounting Organizations and Society, 3, 287–305.
Burgstahler, D., & Dichev, I. (1997). Earnings management to avoid earnings decreases and losses.
Journal of Accounting and Economics, 24, 99–126.
Bushman, R., & Smith, A. (2001). Financial accounting information and corporate governance.
Journal of Accounting and Economics, 32, 237–333.
Center for International Financial Analysis & Research (CIFAR) (1995). In: V. B. Bavishi (Ed.),
International Accounting and Auditing Trends (4th ed.). Princeton, NJ: CIFAR.
Degeorge, F., Patel, J., & Zeckhauser, R. (1999). Earnings management to exceed thresholds. Journal
of Business, 72, 1–33.
Dicey, A. V. (1915). An introduction to the study of the Law of the Constitution. Liberty Classics
Reprint of 8th Edition, pp. 107–122.
Edlin, A. S., & Stiglitz, J. E. (1997). Discouraging rivals: Managerial rent-seeking and economic
inefficiencies. NBER Working Paper No. W4145.
Faccio, M. (2002). Politically-connected firms: Can they squeeze the State? Working Paper, University
of Notre Dame.
Fishman, R. (2001). Estimating the value of political connections. American Economic Review, 91,
1095–1102.
Gaballero, R. J., & Hammom, M. L. (1998). The macroeconomics of specificity. Journal of Political
Economy, 106, 4.
Gernon, H., & Wallace, R. S. O. (1995). International accounting research: A review of its ecology,
contending theories and methodologies. Journal of Accounting Literature, 14, 54–106.
Hausman, J. A. (1978). Specification tests in econometrics. Econometrics, 4, 1251–1270.
Hayn, C. (1995). The information content of losses. Journal of Accounting and Economics, 7,
85–107.
Healy, P. (1985). The effects of bonus schemes on accounting decisions. Journal of Accounting and
Economics, 7, 85–107.
Hellman, J. S., Jones, G., & Kaufmann, D. (2000). Seize the state, seize the day. State capture,
corruption, and influence in transition. World Bank Policy Research Working Paper No. 24–44.
International Accounting Standards Committee (1997). Insight (October).
Johnson, S., & Mitton, T. (2002). Cronyism and capital controls: Evidence from Malaysia. Journal of
Financial Economics (forthcoming).
Kroszner, R. S., & Stratmann, T. (1998). Interest group competition and the organization of congress:
Theory and evidence from financial services’ Political Action Committees. American Economic
Review, 88, 1163–1188.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. (1997). Legal determinants of
external finance. The Journal of Finance, 52, 1131–1150.
La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. (1998). Law and finance. Journal of
Institutional and Theoretical Economics, 154, 1113–1155.
38 AHMED RIAHI-BELKAOUI

Leuz, C., Dhananjay, N., & Wysocki, P. D. (2001). Investor protection and earnings management: An
international comparison. Working Paper, Wharton School.
Miller, P. (1990). On the interrelations between accounting and the state. 15(4), 315–338.
Ramsey, F. I. (1969). Test for specification errors in classical linear least squares regression analysis.
Journal of the Royal Statistical, 31(Series B), 31.
Rangan, S. (1998). Earnings management and the performance of seasoned equity offerings. Journal
of Financial Economics, 50, 101–122.
Roberts, B. E. (1990). A dead senator tells no lies: Seniority and the distribution of federal benefits.
American Journal of Political Science, 34, 31–58.
Saudagaran, S., & Diga, J. (1997). Financial reporting in emerging capital markets: Characteristics
and policy issues. Accounting Horizons, 11, 41–64.
Shauer, F. (2000). First amendment opportunism. KSG Working Paper No. 00-011. John F. Kennedy
School of Government, Harvard University.
Shivakumar, L. (2000). Do firms mislead investors by overstating earnings before seasoned equity
offerings? Journal of Accounting and Economics, 29, 339–371.
Stulz, R. M., & Williamson, R. (2001). Culture, openness and finance. Working Paper, Ohio State
University.
Teoh, S. H., & Wong, T. J. (2002). Why do new issues and high-accrual firms underperform: The role
of analysts’ credibility. Review of Financial Studies.
Thursby, F. I. (1981). A test for strategy for discriminating between auto-correlation and misspecifi-
cation in regression analysis. Review of Economics and Statistics, 63, 117–123.
Thursby, F. I. (1985). The relationship among the specification test of Hausman, Ramsey and Chow.
Journal of the American Statistical Association, 80, 926–928.
Wallace, O. R. S., & Gernon, H. (1991). Frameworks for international comparative financial
accounting. Journal of Accounting Literature, 10, 209–264.
White, H. A. (1980). Heteroscedasticity-consistent covariance matrix estimator and a direct test for
heteroscedasticity. Econometrica, 10, 817–838.
Wingate, M. (1997). An examination of cultural influence on audit environments. Research in
Accounting Regulation (Suppl. 1), 129–148.
Wu, P. (1973). Alternative tests of independence between stochastic regressors and disturbances.
Econometrics, 15, 737–750.