The moderating effect of political connection on the relationship between non-audit services and accounting quality: Evidence from an emerging market

Figures & data

Table 1. Sample breakdown

Panel A: Breakdown by industry
Industry	N	Percent
Communication Services	55	2.45
Consumer Discretionary	317	14.12
Consumer Staples	363	16.17
Energy	91	4.05
Financials	5	0.22
Health Care	39	1.74
Industrials	650	28.95
Information Technology	163	7.26
Materials	397	17.68
Real Estate	159	7.08
Utilities	6	0.27
Total	2,245	100
Panel B: Breakdown by year
Year	Freq.	Percent
2013	448	19.96
2014	454	20.22
2015	448	19.96
2016	451	20.09
2017	444	19.78
Total	2,245	100

Table 2. Descriptive statistics

Panel A: Firm-level variables
Variable		Obs	Mean			Std.Dev.		Min		Max
|DACC1|		2245	0.386			0.452		0.000		4.334
|DACC2|		2245	0.397			0.464		0.000		4.440
DUM_POL		2245	0.453			0.498		0.000		1.000
NUM_POL		2245	0.647			0.879		0.000		7.000
HI_NAS		2245	0.239			0.427		0.000		1.000
L_NAS		2245	02.28			1.997		−1.204		8.191
FSIZE		2245	18.613			1.371		15.459		23.865
ROA		2245	0.034			0.106		−2.724		0.525
LEV		2245	0.178			0.154		0.000		0.877
GROWTH		2245	0.077			1.141		−1.000		26.160
BIG4		2245	0.471			0.499		0.000		1.000
CINT		2245	0.332			0.218		0.000		0.944
INVINT		2245	0.148			0.132		0.000		0.856
RDINT		2245	0.000			0.000		0.000		0.001
MKTBK		2245	1.482			3.955		0.013		80.84
Panel B: Univariate differences between variables of PCON and non-PCON firms
Variable	Non-PCON (N = 1228)				PCON (N = 1017)				p-values for differences
	Mean			SD	Mean		SD		diff		t
|DACC1|	0.424			0.424	0.340		0.480		0.087***		(4.510)
|DACC2|	0.436			0.435	0.350		0.492		0.090***		(4.530)
NUM_POL	0.000			0.000	1.429		0.767		−1.427***		(−59.529)
HI_NAS	0.216			0.412	0.267		0.443		−0.054**		(−2.978)
L_NAS	2.179			1.913	2.402		2.088		−0.243**		(−2.833)
FSIZE	18.385			1.273	18.888		1.434		−0.517***		(−8.908)
ROA	0.034			0.123	0.035		0.081		−0.001		(−0.251)
LEV	0.165			0.149	0.194		0.158		−0.029***		(−4.491)
GROWTH	0.057			0.823	0.100		1.434		−0.043		(−0.841)
BIG4	0.471			0.499	0.472		0.499		−0.004		(−0.171)
CINT	0.337			0.206	0.325		0.231		0.013		(1.347)
INVINT	0.157			0.134	0.136		0.130		0.022***		(3.955)
RDINT	0.000			0.000	0.000		0.000		−0.000**		(−3.208)
MKTBK	1.631			4.928	1.301		2.274		0.301		(1.900)

Notes: t statistics in parentheses. * p < 0.10, ** p < 0.05, *** p < 0.01. See, Table 1 for the variable definitions.

Table 3. Regression estimates of the effect of politically connected firms and the provision of non-audit services on discretionary accruals

	(1)	(2)
Variable	|DACC1|	|DACC1|
Intercept	5.061***	5.066***
	(42.746)	(42.827)
DUM_POL	0.035***	0.052***
	(2.629)	(3.445)
HI_NAS	0.050***	0.085***
	(2.933)	(3.763)
DUM_POL *HI_NAS		−0.072**
		(−2.360)
FSIZE	−0.252***	−0.252***
	(−41.713)	(−41.816)
ROA	−0.069	−0.064
	(−1.024)	(−0.949)
LEV	−0.044	−0.045
	(−0.940)	(−0.971)
GROWTH	0.010*	0.011*
	(1.841)	(1.875)
BIG4	−0.031**	−0.030**
	(−2.074)	(−1.994)
CINT	0.053	0.048
	(1.466)	(1.337)
INVINT	−0.099*	−0.104*
	(−1.789)	(−1.883)
RDINT	697.344***	709.997***
	(4.801)	(4.890)
MKTBK	0.004**	0.004**
	(2.363)	(2.275)
Industry effects	Yes	Yes
Year effects	Yes	Yes
Adj. R^2	0.55	0.55
N	2245	2245
F-stat	110.345	106.534

*, ** and *** represent significance at p < 0.10, <0.05 and <0.01, respectively. t-values are reported in the parentheses.

Table 4. Regression estimates using the propensity score matching procedure

First Stage		Second Stage
	(1)		(2)	(3)	(4)
Variable	DUM_POL	Variable	|DACC1|	|DACC1|	|DACC1|
Intercept	−5.106***	Intercept	5.736***	5.693***	5.745***
	(−7.170)		(35.366)	(35.397)	(35.351)
FSIZE	0.289***	DUM_POL	0.063***	0.079***
	(7.408)		(3.375)	(3.204)
LEV	0.572*	HI_NAS	0.123***		0.095***
	(1.885)		(4.082)		(3.445)
BIG4	−0.334***	DUM_POL*HI_NAS	−0.138***
	(−3.421)		(−3.422)
CINT	−0.514**	L_NAS		0.024***
	(−2.431)			(3.611)
INVINT	−1.381***	DUM_POL*L_NAS		−0.022**
	(−3.878)			(−2.519)
MKTBK	−0.039**	NUM_POL			0.032***
	(−2.425)				(2.726)
		NUM_POL*HI_NAS			−0.056***
					(−2.595)
		ROA	0.049	0.044	0.050
			(0.622)	(0.563)	(0.637)
		GROWTH	0.020***	0.020***	0.020***
			(2.740)	(2.674)	(2.705)
		FSIZE	−0.288***	−0.286***	−0.288***
			(−34.647)	(−34.759)	(−34.553)
		LEV	−0.047	−0.042	−0.043
			(−0.769)	(−0.696)	(−0.704)
		BIG4	−0.022	−0.029	−0.023
			(−1.139)	(−1.475)	(−1.205)
		CINT	0.001	0.005	0.001
			(0.026)	(0.111)	(0.021)
		INVINT	−0.063	−0.054	−0.064
			(−0.896)	(−0.767)	(−0.907)
		MKTBK	0.006	0.005	0.005
			(1.239)	(1.085)	(1.023)
Industry effects	Yes	Industry effects	Yes	Yes	Yes
Year effects	Yes	Year effects	Yes	Yes	Yes
Pseudo R^2	0.0348	Adj. R^2	0.56	0.55	0.55
N	2230	N	1438	1438	1438
LR chi2	106.74	F-stat	72.734	72.336	72.142

* and *** represent significance at p < 0.10, <0.05 and <0.01, respectively. t-values are reported in the parentheses.

Table

Variable	Definition
Dependent Variables
|DACC1|	The absolute value of residual generated from the Kothari et al. (2005) performance adjusted model estimated based on Fama and French’s (1997) 10 industry groups
|DACC2|	The absolute value of residual generated from the modified-Jones performance adjusted model (Dechow et al., 1995) estimated based on Fama and French’s (1997) 10 industry groups
Independent Variable
HI_NAS	A dummy variable that takes value one for the fourth (high) quartile of based on non-audit fees paid to the incumbent auditors and zero otherwise.
L_NAS	The natural logarithm of non-audit fees paid to the incumbent auditors.
Moderating variable
DUM_POL	A dummy variable that takes value one if at least one of the directors is politician and zero otherwise.
NUM_POL	The number of politicians on the board of directors.
Control variables
FSIZE	The natural logarithm of total assets
ROA	The ratio of net income to the total assets
LEV	The ratio of total debts divided by total assets
GROWTH	The change of annual net sales over last year sales
BIG4	A dummy variable that takes a value of one if the firm was audited by one of the Big Four auditors and zero otherwise.
CINT	The ratio of net book value of property, plant and equipment to total assets
INVINT	The ratio of total inventories to total sales.
RDINT	The ratio of research and development expenditure to total assets
MKTBK	The ratio of market to book value

Table

Variables	(1)	(2)	(3)	(4)	(5)	(6)	(7)	(8)
(1) |DACC1|	1.000
(2) |DACC2|	0.990*	1.000
(3) DUM_POL	−0.092*	−0.093*	1.000
(4) NUM_POL	−0.138*	−0.139*	0.810*	1.000
(5) HI_NAS	−0.237*	−0.237*	0.060*	0.116*	1.000
(6) L_NAS	−0.234*	−0.234*	0.056*	0.103*	0.769*	1.000
(7) FSIZE	−0.729*	−0.729*	0.183*	0.259*	0.367*	0.344*	1.000
(8) ROA	−0.110*	−0.110*	0.004	0.003	0.077*	0.073*	0.128*	1.000
(9) LEV	−0.237*	−0.238*	0.092*	0.095*	0.102*	0.081*	0.318*	−0.179*
(10) GROWTH	−0.005	−0.004	0.019	0.014	0.014	0.031	0.046	0.077*
(11) BIG4	−0.319*	−0.320*	0.001	0.079*	0.372*	0.433*	0.406*	0.063*
(12) CINT	−0.015	−0.012	−0.028	−0.051	0.057*	0.029	0.021	−0.085*
(13) INVINT	0.068*	0.067*	−0.082*	−0.110*	−0.070*	−0.059*	−0.145*	0.032
(14) RDINT	−0.054	−0.055*	0.074*	0.080*	0.032	0.015	0.173*	−0.002
(15) MKTBK	−0.049	−0.050	−0.041	−0.034	0.116*	0.120*	0.115*	0.285*
Variables	(9)	(10)	(11)	(12)	(13)	(14)	(15)
(9) LEV	1.000
(10) GROWTH	0.005	1.000
(11) BIG4	0.077*	−0.040	1.000
(12) CINT	0.025	−0.044	0.121*	1.000
(13) INVINT	0.099*	0.007	−0.133*	−0.295*	1.000
(14) RDINT	0.092*	−0.009	0.035	0.052	−0.042	1.000
(15) MKTBK	−0.008	0.007	0.096*	0.033	−0.068*	0.014	1.000

*shows significance at the .01 level

Table

	(1)	(2)	(3)	(4)	(5)
Variable	|DACC2|	|DACC1|	|DACC1|	|DACC1|	|DACC2|
Intercept	5.195***	5.020***	5.148***	5.108***	5.238***
	(42.842)	(42.793)	(42.804)	(42.741)	(42.752)
DUM_POL	0.053***	0.061***	0.062***
	(3.422)	(3.038)	(3.024)
HI_NAS	0.088***			0.078***	0.080***
	(3.792)			(3.721)	(3.749)
DUM_POL*HI_NAS	−0.074**
	(−2.373)
L_NAS		0.013***	0.013***
		(2.611)	(2.636)
DUM_POL *L_NAS		−0.011*	−0.012*
		(−1.714)	(−1.726)
NUM_POL				0.039***	0.040***
				(4.113)	(4.089)
NUM_POL*HI_NAS				−0.038**	−0.039**
				(−2.425)	(−2.435)
FSIZE	−0.259***	−0.250***	−0.256***	−0.254***	−0.261***
	(−41.834)	(−41.786)	(−41.802)	(−41.712)	(−41.727)
ROA	−0.068	−0.066	−0.069	−0.064	−0.068
	(−0.977)	(−0.970)	(−0.998)	(−0.952)	(−0.980)
LEV	−0.047	−0.043	−0.044	−0.044	−0.046
	(−0.974)	(−0.916)	(−0.919)	(−0.949)	(−0.953)
GROWTH	0.011**	0.011*	0.011*	0.011*	0.011**
	(1.974)	(1.860)	(1.958)	(1.863)	(1.961)
BIG4	−0.031**	−0.031**	−0.032**	−0.032**	−0.033**
	(−2.042)	(−1.995)	(−2.044)	(−2.123)	(−2.170)
CINT	0.054	0.053	0.059	0.051	0.057
	(1.465)	(1.460)	(1.588)	(1.405)	(1.533)
INVINT	−0.110*	−0.097*	−0.103*	−0.097*	−0.103*
	(−1.934)	(−1.757)	(−1.806)	(−1.752)	(−1.803)
RDINT	725.257***	701.520***	716.559***	687.599***	702.150***
	(4.873)	(4.824)	(4.807)	(4.742)	(4.724)
MKTBK	0.004**	0.004**	0.004**	0.004**	0.004**
	(2.225)	(2.288)	(2.238)	(2.351)	(2.300)
Industry effects	Yes	Yes	Yes	Yes	Yes
Year effects	Yes	Yes	Yes	Yes	Yes
Adj. R^2	0.55	0.55	0.55	0.55	0.55
N	2245	2245	2245	2245	2245
F-stat	106.732	105.900	106.091	106.915	107.106

*, ** and *** represent significance at p < 0.10, <0.05 and <0.01, respectively. t-values are reported in the parentheses.

Table

	(1)	(2)	(3)
Variable	PCON	NON-PCON	POOLED
Intercept	5.296***	5.748***	5.351***
	(26.498)	(36.200)	(43.441)
LNAS	−0.056***	−0.070***	−0.055***
	(−3.545)	(−5.658)	(−5.616)
LNAS^2	0.010***	0.019***	0.012***
	(3.602)	(7.886)	(6.953)
FSIZE	−0.261***	−0.287***	−0.266***
	(−25.480)	(−35.634)	(−42.511)
ROA	−0.328**	0.025	−0.060
	(−2.107)	(0.354)	(−0.866)
LEV	−0.082	−0.116**	−0.049
	(−1.008)	(−2.011)	(−1.036)
GROWTH	0.015*	0.011	0.012**
	(1.919)	(1.138)	(1.997)
BIG4	0.021	−0.060***	−0.029*
	(0.754)	(−3.321)	(−1.842)
CINT	−0.009	0.107**	0.064*
	(−0.156)	(2.308)	(1.736)
INVINT	0.042	−0.172***	−0.104*
	(0.443)	(−2.590)	(−1.852)
RDINT	618.746***	0.000	647.061***
	(3.646)	(0.000)	(4.370)
MKTBK	0.011**	0.002	0.003
	(2.005)	(1.166)	(1.645)
Industry effects	Yes	Yes	Yes
Year effects	Yes	Yes	Yes
Adj.R2	0.51	0.62	0.56
N	1017	1228	2245
F-stat	44.814	84.453	113.830

*, ** and *** represent significance at p < 0.10, <0.05 and <0.01, respectively. t-values are reported in the parentheses.

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