Policy uncertainty and earnings management: International evidence

Abstract

Policy uncertainty (PU) influences the financial and investment decisions of the firm. We use global data to extend the nascent empirical finance literature on policy uncertainty by examining corporate earnings management. We find overwhelming evidence that policy uncertainty is associated with earnings management. Firms increase (decrease) earnings management (EM) when policy uncertainty is high (low). Our results show that uncertainty induced earnings management is not influenced by national culture or other country-level institutional characteristics. Further, we find that policy uncertainty induced earnings management harms firm value. The observation implies that low-quality financial reporting impairs firm value. Our results withstand a battery of robustness tests, such as removing the effect of general economic uncertainty from the measure of PU and using other measures of earnings management.