Elections and Discretionary Accruals: Evidence from 2004

Abstract

We examine the accrual choices of outsourcing firms with links to US congressional candidates during the 2004 elections, when corporate outsourcing was a major campaign issue. We find that politically-connected firms with more extensive outsourcing activities have more income-decreasing discretionary accruals. Further, relative to adjacent periods, the evidence is concentrated in the two calendar quarters immediately preceding the 2004 election, consistent with heightened incentives for firms to manage earnings during the election season. The incentives can be attributed to donor firms' concerns about the potentially negative consequences of scrutiny over outsourcing for themselves and for their affiliated candidates.

Keywords: accounting information, accruals management, campaign contributions, discretionary accruals, earnings management, election outcomes, political currency, political economy, political process

JEL Classification: D72, M41, M43, M44, M49, P16