Political Hypotheses (Political Costs) and Financial Reporting Quality: Empirical Evidence from Tehran Stock Exchange

Using structural equation modeling approach, this research aims to explore the effect of political costs on financial reporting quality. For this purpose, 66 publicly-listed firms from Tehran Stock Exchange for the period 2006 to 2014 were selected as the final data set. As an independent variable, the observable variables such as capital intensity, concentrate rate, tax ratio, firm size, employee intensity, and risk were used to proxy the political cost. In addition, quality of accruals, disclosure quality, earnings persistence, and accuracy of financial information were used to measure financial reporting quality which is dependent variable and growth opportunities and leverage were considered as control variables. The results indicated that political costs had a negative and meaningful effect on financial reporting quality.