Political cost earnings management

  • Do political connections reduce earnings management?

    Empirical evidence on the association between political connections and earnings management remains unclear and offers mixed results.
    Using a sample of Indonesian firms, we find that political connections are negatively related to accrual-based (AEM) and real (REM) earnings management..

  • What is political cost in accounting?

    The political cost hypothesis assumes that firms will tend to show their profits lower by using different accounting methods and procedures so that the firm does not attract the attention of politicians, who will have an eye on high profit industries..

  • What is political costs?

    In a political hypothesis, political cost refers to increased taxes and tough regulations that companies that make high earnings attract from the government..

  • What is the meaning of political cost hypothesis?

    The political cost hypothesis assumes that firms will tend to show their profits lower by using different accounting methods and procedures so that the firm does not attract the attention of politicians, who will have an eye on high profit industries..

  • What is the political cost hypothesis earnings management?

    The political cost hypothesis predicts that firms subject to government investigation may have incentives to manage earnings in order to reduce the probability and/or the amount of government-imposed wealth transfers..

  • What is the political cost theory?

    The political cost hypothesis assumes that firms will tend to show their profits lower by using different accounting methods and procedures so that the firm does not attract the attention of politicians, who will have an eye on high profit industries..

  • Several techniques are used to manage earnings.
    Examples include lowering capitalization limits, changing from the last-in first-out method of valuing inventory to the first-in first-out method, cutting nonmandatory expenses for short periods, or attributing regular business expenses to a one-off, nonrecurring event.
  • There are five common strategies and techniques of earnings management.
    They include the Big Bath, Cookie Jar Reserves, Operating Activities, Materiality and Revenue Recognition methods.
  • What are the methods of earnings management? There are five common strategies and techniques of earnings management.
    They include the Big Bath, Cookie Jar Reserves, Operating Activities, Materiality and Revenue Recognition methods.
Earnings management is measured using discretionary accruals, and data are consistent with managerial incentives to mitigate the effects of political scrutiny 
The political cost hypothesis predicts that firms subject to government investigation may have incentives to manage earnings in order to reduce the probability and/or the amount of government-imposed wealth transfers.
The political cost hypothesis predicts that managers of corporations exposed to regulatory attention have incentives to manage earnings (e.g., by manipulating accounting accruals) in order to reduce the likelihood and/or the amount of these political costs.

Do firms' political costs have any impact on earnings management?

Based on a sample of Tunisian firms, univariate and multivariate analyses are used to test whether firms’ political costs have any impact on earnings management.
The empirical analysis indicates that the executives’ political connection is not directly related to earnings management.

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Does income-decreasing earnings management cope with political costs induced by air pollution?

If the firms engage in income-decreasing earnings management to cope with political costs induced by air pollution, we will observenegative coefficients on Air Pollution × Air-polluting Firm.
Dependent variable is discretionary accruals ( DACCi,t ), and the independent variable of interest is Air Pollution × Air-polluting Firm.

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How do you measure political costs?

POLI is the variable for political costs, specifically measured by the three variables:

  • GROUP
  • GROWTH and RATIO.
    According to Hypothesis 1, POLI should be significantly negative.
    Model (1) is as follows:(1) DA = β 0 + β 1 POLI + β 2 SIZE + β 3 ROA + β 4 LEV + β 5 L _ TA + β 6 CHANGE + β 7 TOP + ε .
    • ,

    Is a firm's size a suitable measure of its political cost?

    The study is a pioneer in proving that a firm’s size is not always a suitable measure of its political cost.
    It extends the accounting literature on the role of political economy in the application of the political costs hypothesis.


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