Political connections and earnings opacity: the role of integrated reporting quality

Abstract

Purpose: This paper empirically investigates the ability of integrated reporting quality (IRQ) to mitigate earnings opacity (EO) in politically connected firms and improve financial transparency. It also examines how IRQ moderates the relationship between political connections (PC) and EO among firms listed on the Egyptian Stock Exchange (EGX).

Design/methodology/approach: A panel of 200 firm-year observations is examined over the period 2019–2023, comprising a final sample of 40 non-financial companies listed on the EGX. Multiple regression analyses are conducted. Earnings management serves as a proxy for EO, and IRQ scores are derived from companies’ integrated reports, based on the integrated reporting (IR) index developed by ElDeeb (J Account Res 3(2):1–33, 2019). Data on PC are collected from corporate governance reports and publicly available biographies of board members.

Findings: The findings reveal a positive relationship between PC and EO; however, the introduction of the moderating effect of IRQ significantly weakens this relationship. The results support the notion that IR, by providing a holistic overview of a firm's financial and non-financial performance, can alleviate the adverse effects of PC on the quality and transparency of financial reporting.

Originality/value: The findings of this paper are highly relevant to various stakeholders. For policymakers, the results can support regulation-enabling guidelines that promote transparency in firm disclosure and eradicate adverse impacts of political influence on earnings concealment. For firms, adopting high-quality IR practices enhances investor confidence and ensures the persistence of long-term performance. For investors and financial analysts, the research offers valuable insights that facilitate a more informed evaluation of the risks associated with political linkage and EO.