Political stability, political rights and earnings management: some international evidence

Abstract

Purpose

This study aims to examine the impact of political stability and political rights on firm-level earnings (both accrual-based and real) management.

Design/methodology/approach

The authors develop models that link political stability, political rights, and the interplay between the two and earnings (both accrual-based and real) management. The authors analyze 63,872 firm-year observations of publicly listed, non-financial, firms drawn from 39 countries, for the period 1995 to 2016.

Findings

The authors find that political stability (political rights) attenuates (accentuates) accrual-based earnings management; political rights (political stability) accentuates (have no effect on) real earnings management; and the association between political rights and real earnings management is more pronounced in countries with better political stability.

Practical implications

The findings imply that users of financial statements should take cognizance of a country’s ambient political environment in assessing the potential for earnings management by firms.

Originality/value

No prior research examined the role of political forces in shaping firm-level earnings management behavior in a cross-country setting.

Citation

Lemma, T.T., Lulseged, A., Mlilo, M. and Negash, M. (2018), "Political stability, political rights and earnings management: some international evidence", Accounting Research Journal, Vol. 33 No. 1, pp. 57-74. https://doi.org/10.1108/ARJ-11-2017-0182