Political Uncertainty and Accounting Conservatism

Dai, Lili; Ngo, Phong T. H.

doi:10.1080/09638180.2020.1760117

Cited by 79 publications

(64 citation statements)

References 80 publications

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“…We use Khan and Watt's () asymmetric timeliness measure because it provides a firm‐year measure of accounting conservatism with more variation than the traditional Basu () measure. Consistent with Dai and Ngo (), we also find that firms are more conservative during election years. Importantly, however, we find that our main results continue to hold after including the C score as an additional control variable interacting with the earnings variables, suggesting that our election dummy is not simply capturing differences in accounting conservatism.…”

Section: Primary Empirical Testssupporting

confidence: 90%

“…An important feature of model (1) is that X t– 1 and X t also interact with the election year indicator, thus controlling for any systematic differences in earnings response coefficient during election years. Two recent studies provide evidence that managers make temporary changes in investment and accounting policies during election years (see, for example, Julio & Yook, ; and Dai & Ngo, ). The inclusion of the interactions between X t– 1 and X t and the election year indicator allows us to control for any actions that managers take during the election year that influence the nature of current period earnings.…”

Section: Empirical Method Data and Samplementioning

confidence: 99%

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Pushing the future back: The impact of policy uncertainty on the market pricing of future earnings

Drake

Mayberry

Wilde

2018

Business Fin & Account

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We examine whether policy uncertainty triggered by presidential elections pushes the future back by reducing the extent to which current prices reflect information about future earnings. We estimate future earnings response coefficients (FERCs) for the years 1975–2013, a period that covers ten presidential elections. We find that FERCs are significantly lower (by 11.8%) during presidential election years compared to other years. Additional analyses using pseudo election years, ex‐ante polls, contract prices from the Iowa Electronic Political Market, and cross‐sectional firm characteristics provide corroborating evidence that the lower FERCs during election years are related to policy uncertainty. We also investigate potential explanations for the lower FERCs during election years. We find that the lower FERCs relate to forecasting difficulty rather than to changes in the discount rate or in the amount of noise trading. Finally, we find that market prices move toward future earnings to a greater degree during presidential election years compared with other years once the policy uncertainty is resolved. A trading strategy based on this drift yields significant abnormal returns. Overall, we contribute to the literature by providing the first empirical evidence that shocks to policy uncertainty influence the pricing of earnings information.

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Section: Primary Empirical Testssupporting

confidence: 90%

Section: Empirical Method Data and Samplementioning

confidence: 99%

Pushing the future back: The impact of policy uncertainty on the market pricing of future earnings

Drake

Mayberry

Wilde

2018

Business Fin & Account

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“…Dai and Ngo () examine the effect of political uncertainty on accounting conservatism, using a sample of 199 110 firm‐year observations between 1963 and 2016. They find that the asymmetric timeliness of news recognition in earnings increases in periods leading up to US gubernatorial elections because higher political uncertainty causes an increased contracting demand for accounting conservatism.…”

Section: Political Uncertainty and Corporate Policiesmentioning

confidence: 99%

Political Uncertainty and Finance: A Survey

Dai

Zhang

2019

Asia-Pac J of Fin Stud

Self Cite

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An emerging stream of literature investigates the impact of political uncertainty on financial markets. In this survey, we review this line of literature from four perspectives, namely, asset prices, corporate policies, financial intermediaries, and economy and households, suggesting that political uncertainty generally increases market friction and as a result changes corporate behavior and adversely affects the economy. At the end of the survey, we discuss a few future directions worth being explored in view of the relationship between political uncertainty and finance. most likely to occur if the old policy has led to unexpected low realized profitability. Therefore, policy change can increase firms' expected profitability, thereby pushing stock prices up, that is, the cash flow effect. However, due to the new policy's higher uncertainty, policy change can also increase discount rates, thereby pushing stock prices down, that is, the discount rate effect. The authors show analytically that, on average, the discount rate effect will outweigh the cash flow effect and stock prices will fall at the announcement of a government policy change. The reason is that positive announcement returns tend to be small as policy changes that have the potential to push stock prices up are mostly expected by investors. Moreover, as new policies introduce more uncertainty and raise the volatility of the stochastic discount factor, government policy changes will increase stock return volatilities and correlations.Closely related to P astor and Veronesi (2012, 2013) analyze the risk premium induced by political uncertainty. P astor and Veronesi (2013) extend the general equilibrium model developed by P astor and Veronesi (2012) in two key aspects. First, unlike P astor and Veronesi (2012) who assume political cost is unknown to investors, P astor and Veronesi (2013) allow investors to learn about the political costs of the new policies through the stream of political news. Second, P astor and Veronesi (2012) assume that all government policies are identical a priori, whereas P astor and Veronesi (2013) allow the government to choose from a set of heterogeneous policies. The impacts of both, the learning about political costs and policy heterogeneity, are larger in weak economic conditions when a policy change is more likely to happen.Accordingly, in P astor and Veronesi's (2013) analytic model, stock returns are driven by capital shocks, impact shocks, and political shocks, and correspondingly the equity risk premium can be decomposed into three components based on the three types of shocks. As the optimal choice for the government is to change its policy when the old policy is perceived as sufficiently unfavorable, the authors show analytically that the composition of the risk premium varies depending on the economic state. In weak economic conditions when the probability of a policy change is high, the equity risk premium is largely driven by the political risk premium. However, in strong economic conditions when a policy change ...

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“…Research has demonstrated that uncertainty increases the information asymmetry between firm internal management and information users. For example, high uncertainty increases firm debt costs, including bank loans and municipal bonds [3,22,42]; governor election inhibits the IPO of firms [43]; and general election encourages accounting conservatism [44,45]. In other words, reduced external explicit information produces negative agency cost benefit, and investors will reiterate requirements for high-quality information.…”

Section: For the Purpose Of Sustainability: Economic Policy Uncertainmentioning

confidence: 99%

Firms’ Sustainability: Does Economic Policy Uncertainty Affect Internal Control?

Liao

Wang

2019

Sustainability

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This paper studies whether economic policy uncertainty (EPU) influences internal control (IC). Exploiting EPU as an exogenous shock and using unique internal control index data at the firm level from China, we can make causal inferences about the EPU effect on IC, and provide new insight into firms’ sustainability. Our results show that firms tend to cope with higher EPU by improving IC, indicating their efforts to ensure sustainability development. We also find that this trend is intensified for firms localized in regions with a lower marketization degree, state-owned firms, or firms with fewer analysts following. Further analyses show that EPU significantly reduces the internal control auditing fees, hence backing up the association between EPU and IC. Unlike the previous literature, this paper shows the important role of internal control for firms in coping with EPU, which is of crucial significance to how firms seek to adhere to sustainable development and how economic policy works best.

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Political Uncertainty and Accounting Conservatism

Cited by 79 publications

References 80 publications

Pushing the future back: The impact of policy uncertainty on the market pricing of future earnings

Pushing the future back: The impact of policy uncertainty on the market pricing of future earnings

Political Uncertainty and Finance: A Survey

Firms’ Sustainability: Does Economic Policy Uncertainty Affect Internal Control?

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