Corporate Lobbying, Political Protection, and Earnings Management

49 Pages Posted: 26 Jul 2018 Last revised: 18 Dec 2018

See all articles by Anwer S. Ahmed

Anwer S. Ahmed

Texas A&M University - Mays Business School

Scott Duellman

Saint Louis University - Department of Accounting

Megan Grady

Texas A&M University - Mays Business School

Date Written: October 30, 2018

Abstract

We provide evidence on the effects of corporate lobbying on earnings management (EM). We argue that corporate lobbying provides firms with some degree of political protection from enforcement of laws and regulations. Thus, lobbying firms face a lower threat of enforcement which in turn reduces the costs of EM for these firms. Moreover, the potentially weaker enforcement alters the relative costs of accrual management (AM) and real earnings management (RM). We expect lobbying firms to engage in more income increasing AM and less income increasing RM. We find strong evidence consistent with lobbying firms engaging in more EM (in absolute terms), more income increasing AM, and less income increasing RM. Furthermore, we find that when firms directly lobby the SEC the impact on firm AM and RM is greater compared to lobbying other government organizations. Our results are robust to several tests to rule out endogeneity as an explanation for our results and to the use of alternative estimation approaches. Overall, our evidence is consistent with lobbying firms facing lower regulatory enforcement and using this flexibility to reduce RM that is potentially value destructive.

Keywords: Corporate Lobbying, Earnings Management, Real Earnings Management, Discretionary Accruals

JEL Classification: M41, M48, K22

Suggested Citation

Ahmed, Anwer S. and Duellman, Scott and Grady, Megan, Corporate Lobbying, Political Protection, and Earnings Management (October 30, 2018). Available at SSRN: https://ssrn.com/abstract=3219428 or http://dx.doi.org/10.2139/ssrn.3219428

Anwer S. Ahmed

Texas A&M University - Mays Business School ( email )

430 Wehner
College Station, TX 77843-4353
United States

Scott Duellman

Saint Louis University - Department of Accounting ( email )

3674 Lindell Blvd.
St. Louis, MO 63108
United States

Megan Grady (Contact Author)

Texas A&M University - Mays Business School ( email )

430 Wehner
College Station, TX 77843-4353
United States

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