Political uncertainty and financial statement readability

In this paper, we examine the impact of political uncertainty on financial statement readability. Using the turnovers of local government leaders in China as the proxy for political uncertainty, we find that financial statement readability is lower when political uncertainty is higher. The negative relation between political uncertainty and financial statement readability is more pronounced for corporates with lower capital market concerns, lacking political connections, and under weaker external reporting scrutiny. We further identify the incentives of local government leaders as the underlying driver for the relation between political uncertainty and financial statement readability. The findings extend our understanding of how political uncertainty may affect corporate behaviors.