Political Uncertainty and Accounting Conservatism

Abstract

Political uncertainty leads to greater information asymmetry among contracting parties to the firm, resulting in an increased demand for accounting conservatism. Exploiting the exogenous variation in political uncertainty induced by the U.S. gubernatorial election cycle over the period 1963–2016, we find that the asymmetric timeliness of news recognition increases with political uncertainty. Our political uncertainty hypothesis operates through the contracting demand channel. Accordingly, we find that the political uncertainty effect is more pronounced for firms in states with lower electoral participation, for firms with greater industry exposures to contracting needs, for firms with higher leverage and lower managerial ownership, and for firms with stronger internal corporate governance mechanisms.