Public Sector Transparency and Corporate Accounting Practices in Asia

This article examines the impacts of firms’ political environment on the quality of their accounting practices. In specific, we hypothesize that the quality of political institutions is among the determinants of firms’ decisions regarding accounting practices, and test the hypothesis with a unique cross-country firm-level data set. Our results show that quality of corporate accounting practices is positively related to the quality of political institutions as measured by predictability of rules, laws, and regulations and of their interpretations in implementation. In political environments characterized by opaque public sector, it may be advantageous for firms to adopt shady accounting practices to cope with various risks arising from information asymmetry between government and business.