Political, economic, financial uncertainty, and real earnings management

Abstract

We examine the relationship between uncertainty (political, economic, and financial) on real earnings management (REM). Covering nine presidential elections in the U.S. from 1980 to 2012, we find that firms limit overproduction in pre‐election years followed by reductions in REM activities in election years. We also show that economic and financial uncertainty (FU) stimulate firms’ use of REM through cutting back discretionary expenses such as advertising, research and development, and selling, general, and administrative expenses. We also find that firms with higher agency costs reduce REM during election years whereas larger firms accelerate REM during political, economic policy, and FU.

Political uncertainty and earnings management: Evidence from Latin American countries

“…In this regard, findings can be pointed towards the positive impact of political uncertainty on earnings management for the North American (Bermpei et al, 2022) and Chinese (Cui et al, 2020) capital markets, taking EPU measurement and accruals-based management. On the other hand, evidence can also be pointed out indicating a reduction in earnings management following greater political uncertainty in the US capital market (Jain et al, 2021), considering the year of presidential elections and activity-based earnings management real; this finding was also found for the Japanese capital market (Kim & Yasuda, 2021), however considering the EPU measure and the practice of earnings management based on accruals. It is noteworthy that Roma et al (2021) also signaled the negative impact of political uncertainty on earnings management in a sample of firms in the US market, using the EPU measure and earnings management based on accruals as a proxy; the tests also involved a sample of firms from the Brazilian market.…”

“…Pieces of evidence in this direction, on the other hand, have not been uniform, so many findings can be pointed toward greater earnings management in periods of political uncertainty (Bermpei et al, 2022;Cui et al, 2020;Yung & Root, 2019) and towards less earnings management in periods of political uncertainty (Jain et al, 2021;Kim & Yasuda, 2021;Roma et al, 2021). Such studies, however, did not point out the direction of earnings management practiced by firm managers, that is, whether increasing or reducing earnings.…”