Politicians’ Equity Holdings and Accounting Conservatism

Abstract

In this thesis, I examine the association between politician ownership and accounting conservatism for a sample of S&P 1500 firms between 2005 and 2011. The contracting explanation predicts that politician owned firms adopt less conservative accounting because lenders are less concerned with downside default risk for these politically favored firms. The political costs explanation predicts that politician owned firms adopt more conservative financial reporting to shield allied politicians from voter scrutiny. I find that equity ownership by members of the U.S. House and Senate is associated with lower levels of conditional conservatism. This negative association is more pronounced among: (1) firms owned by local politicians, where there is a greater alignment between the interests of the politician and the firm, and (2) firms with long-term issuer credit ratings, for which debt market participants particularly value conservatism as a mechanism for conveying information on downside default risk. I also examine the relationship between politician ownership and unconditional conservatism and fail to document a statistical relationship between the two constructs. Collectively, the results of my thesis provide consistent evidence of a lower contracting demand for conditional conservatism among politician owned firms.