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Cash holdings, political connections, and earnings quality

Author

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  • Redhwan Al-dhamari
  • Ku Nor Izah Ku Ismail

Abstract

Purpose - – The purpose of this paper is to investigate 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. Design/methodology/approach - – This paper uses ordinary least square and seemingly unrelated regressions upon a sample of the Malaysian top 100 listed firms. Findings - – This paper finds that earnings of firms with excess cash reserves are of high quality. Consistent with previous research, the study finds that investors perceive earnings numbers of politically connected firms as being of low quality. However, this research fails to support an 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. Originality/value - – This research is considered as the first attempt to examine the relationships between cash holdings, political connections, and earnings quality in a developing country such as Malaysia.

Suggested Citation

  • Redhwan Al-dhamari & Ku Nor Izah Ku Ismail, 2015. "Cash holdings, political connections, and earnings quality," International Journal of Managerial Finance, Emerald Group Publishing Limited, vol. 11(2), pages 215-231, April.
    • Handle: RePEc:eme:ijmfpp:v:11:y:2015:i:2:p:215-231
    DOI: 10.1108/IJMF-02-2014-0016
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    Citations

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    Cited by:

    1. Lin, Tsui-Jung & Chang, Hai-Yen & Yu, Hui-Fun & Kao, Ching-Pao, 2019. "The impact of political connections and business groups on cash holdings: Evidence from Chinese listed firms," Global Finance Journal, Elsevier, vol. 40(C), pages 65-73.
    2. Mohammad Abedalrahman Alhmood & Hasnah Shaari & Redhwan Al-dhamari, 2020. "CEO Characteristics and Real Earnings Management in Jordan," International Journal of Financial Research, International Journal of Financial Research, Sciedu Press, vol. 11(4), pages 255-266, July.

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