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Reported earnings are one of the most important accounting information and they could be
regarded as a primary indicator of information quality as suggested by Dechow
et Al
(1998). The earnings
quality is usually assessed using the magnitude and/or the variability of the reported accruals, the
difference between a firm’s earnings and the cash provided from operation. Most earnings quality research
focuses on the discretionary accruals due to their particular features; they include both discretionary and
non-discretionary components and they are believed to reflect managerial judgments. Chaney
et al
(2008)
suggests that as connected firms are reported to an average gain from political ties, they would have the
incentive to expropriate or at least obscure information from minority shareholders. They report empirical
evidence that the quality of earning of the politically connected firms is significantly poorer that of the
non-connected ones. This study aims to investigate the issue of quality of earnings on the politically
connected firms in Thailand along side with the event study of earnings announcement. The analysis of the
market reaction to the earnings announcement of the politically connected firms would help shed the light
to the other form of benefits these firms could attain from political connections in terms of market reaction.
Methodology and Tools
Definition and identification of politically connected firms
In this section, the process of politically connected firms could be summarized into four main steps. It
is vital to note that for the firms to be politically connected, the politicians which are the representatives
and cabinet members connected to them are required to have taken office for at least six months. First, the
family names of politicians, defined as representatives (REP) and cabinet members (VIP), and dates they
taking offices are collected during the period of study, 1998 to 2008. Second, the political connection is
identified between the politicians, defied as representative and cabinet members, the families, defied as
surnames of family owned business groups in Thailand. The four main feathers of connection are indicated
as followed;
i.
A politician is a member of a particular family or, in short, the relationship between the
politician and family is by blood lineage.
ii.
A family has in-law relationship with a politician. The relationship is established through the
marriage between the two groups.
iii.
A family member is known to have a close relationship with the politician or the politician’s
relative.
iv.
A family member has a noteworthy business partner status with a politician
