Abstract
PurposeThis study aims to examine the impact of political stability and political rights on firm-level earnings (both accrual-based and real) management.Design/methodology/approachThe 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.FindingsThe 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 implicationsThe 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/valueNo prior research examined the role of political forces in shaping firm-level earnings management behavior in a cross-country setting.
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