Footnote:
Nach Informationen von SSRN wurde die ursprüngliche Fassung des Dokuments April 20, 2023 erstellt
Description:
Prior research suggests that risk and uncertainty in general, and country-wide political risk in particular, motivate managers to engage in earnings management. Using the text-based proxy for managers’ perception of political risk developed by Hassan et al. (2019), as well as principal components analysis of earnings management (Christensen et al., 2021, 2022) to better capture manipulative conduct, we find that firm-level political risk is significantly positively associated with earnings manipulation using both accruals and real activities, and does so beyond the effect of macro-political risk and other determinants of earnings management from prior research. The results are robust to alternative proxies for political risk and earnings management, various techniques addressing endogeneity concerns, and subsamples of firms with different earnings management incentives. Moreover, we find that the negative relation between earnings management and subsequent operating performance, the very association that justifies referring to earnings management activities as “manipulation,” is more pronounced in firms exposed to more political risk. Collectively, these results suggest that managers are more motivated to manipulate earnings under firm-level political pressure to mitigate the perceived earnings volatility to external investors, and that these political-risk-induced earnings management activities appear to be detrimental