When politics meet accounting: the moderating effect of corporate political connections on the reporting quality-investment efficiency nexus in India

Purpose This study aims to examine the association between financial reporting quality (FRQ) and firms’ investment efficiency and investigates whether corporate political connections moderate this relationship in India. Design/methodology/approach Using an unbalanced panel of 413 non-financial firms listed on the S&P BSE 500 index from 2010 to 2021, we construct three FRQ measures and a composite index and estimate fixed effects panel regressions. We address potential endogeneity using two-stage least squares with the leave-one-out industry-year-mean FRQ as an instrument. Robustness checks employ alternative investment efficiency specifications and bias correction procedures. Findings Higher FRQ is significantly associated with greater investment efficiency across all specifications. Single-party connections strengthen the positive association between FRQ and investment efficiency and its association with lower overinvestment, while the moderating effect of multi-party connections is statistically inconclusive. These findings are robust to endogeneity corrections and alternative specifications, though less robust for overinvestment under bias correction. Originality/value This study provides a theoretically grounded examination of how political connections heterogeneity shapes the governance role of FRQ. By distinguishing single-party from multi-party connections, the study contributes to the literature on political economy and accounting-based governance in emerging markets.