Channeling and dampening: The role of political ties in information disclosure and concealment

Abstract

Non-profit organizations (NPOs) help the state achieve its social objectives. At the same time, they often depend on the private-sector actors for donations. The different beliefs of public- and private-sector actors regarding which practices are desirable for NPOs can affect the transparency of these organizations. We propose that political ties influence NPOs to comply with state-mandated disclosure requirements, while simultaneously dampening their willingness to voluntarily disclose sensitive information that may jeopardize their legitimacy in the eyes of private-sector stakeholders. The impact of political ties on disclosure is contingent upon two factors. First, market institutions moderate such effects because expectations of public- and private-sector actors may diverge more in freer markets than where the state has inordinate power. Second, financial dependence on the state amplifies both effects as dependence on the state exerts more pressure for compliance whilst making politically connected organizations appear even more questionable in the eyes of the private-sector stakeholders. Leveraging a policy shock that weakened political ties, we found that following the policy shock, charities in China reduced their compliance to state-mandated information disclosure, but increased their voluntary disclosure. The opposing roles of political ties in mandatory versus voluntary disclosure is further supported by a policy capturing study involving private donors in China. This study has important implications for research on political ties and information disclosure.