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Political, economic, financial uncertainty, and real earnings management
Author(s) -
Jain Ajeet,
Jackson Dave,
Sakaki Hamid
Publication year - 2021
Publication title -
journal of corporate accounting and finance
Language(s) - English
Resource type - Journals
eISSN - 1097-0053
pISSN - 1044-8136
DOI - 10.1002/jcaf.22485
Subject(s) - earnings management , earnings , presidential election , politics , agency (philosophy) , presidential system , economics , finance , business , monetary economics , political science , philosophy , epistemology , law
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.