5. Conclusions and future research directions
Much attention has been paid to the association between politically connected agents and firm performance, but little work has been done to examine the nexus of politically connected principals and firm performance. In addition, empirical evidence is lacking with regard to how different levels of political connection or affiliation may affect performance differently. In addition, previous studies underexplore the link between real earnings management and firm performance among politically connected firms, thus concealing the potential mechanism through which political connection can affect performance. This study helps fill these gaps in the literature by investigating the effect of government affiliation on firm performance and real earnings management with a large sample of privately held firms in China between 1998 and 2012. We find that political affiliation has a positive effect on firm performance. Furthermore, this relation is moderated by regional development. Second, we show that politically affiliated firms are more likely to undertake real earnings management. The positive effect of political affiliation on real earnings management is less pronounced in firms located in more developed regions. Finally, we present evidence that real earnings management mediates the effect of political affiliation on firm performance. We extend the literature by addressing the role of politically connected owners, distinguishing the effects of principals (owners) with political power from those of politically connected agents (executives).
