Negative information hoarding in politically connected firms: The influence from the central environmental protection inspections

Abstract

This study examines how managerial political connections affect corporate information environment in the context of central government environmental inspections. We find that politically connected firms are associated with higher crash risk than firms without such connections after central government inspections. In addition, we find that firms are more prone to crash risk when they are with achieved political connections (e.g. appointed as members of political advisory bodies), but not ascribed political connections (i.e. have work experience as government officials). Further analyses indicate that politically connected firms are more prone to crash risk after central government inspections due to increased reputational concerns. Overall, our study highlights that politically connected firms may face more challenges in managing negative information when there is intensified regulatory scrutiny, which exacerbates the risk profile of firms.