Firms’ exposure to political risk and financial reporting quality

Abstract

AbstractWe examine the effects of political risk at the firm level on the integrity of financial reports between 2009 and 2019 using a data from U.S. firms. We provide evidence that, as evaluated by quarterly earnings conference call transcripts of companies with analysts that focus on political risk or uncertainty, political risk at the firm level is inversely related to the quality of accounting information. This effect is more likely to happen to firms with a higher agency problem, faster growth, and greater reliance on outside finance. The results persist after controlling macroeconomic variables. Our findings are also robust to alternative financial reporting quality criteria and endogeneity tests, and are economically significant.