Groups of politically connected firms, political uncertainty and earnings credibility in Pakistan

This paper examines the influence of different types of political connections and political uncertainty on earnings credibility in Pakistan. Based on discernible differences, connected firms are grouped into civil connected and military connected firms.

The authors provide evidence concerning the earnings credibility incentives of groups of political connected firms and report that their incentives are significantly different. The findings remain robust to alternate methods of earnings credibility.

The findings evidence that civil (military) connected firms report less (more) credible earnings than the control group. High political uncertainty reduces the credibility of earnings. Results for the interaction of political connections and political uncertainty variables are not significant.

The paper investigates just one aspect of Pakistan's political economy, i.e. credibility of earnings; thus, it requires to be cautious on part of readers and policymakers. To reach a clearer conclusion, earnings credibility should be ex amined in the larger context, i.e. in conjunction with rent extractions, etc. A possible extension of the paper can be to investigate the channels of rent extractions used by the two types of connected firms.

The paper has contribution for policymakers as well as users of general purpose financial reports. The findings indicate that the users of general purpose financial reports should be more careful in the use of financial information during political uncertain periods and also of politically connected firms. Furthermore, policymakers should keep the larger context at the forefront while attempting to strengthen the enforcemnet regime.

This paper adds to extant political connections literature by identifying two types of politically connected firms and report that both groups have divergent financial reporting incentives. Furthermore, political uncertainty reduces the credibility of earnings.