Does Economic Policy Uncertainty Matter for Financial Reporting Quality? Evidence from the United States

35 Pages Posted: 21 Jul 2019

See all articles by Theodora Bermpei

Theodora Bermpei

University of Sussex - School of Business, Management and Economics

Antonios Nikolaos Kalyvas

Department of Banking and Finance, Southampton Business School, University of Southampton

Lorenzo Neri

University of London - Birkbeck College

Antonella Russo

University of Greenwich - Accounting and Finance

Date Written: July 03, 2019

Abstract

We examine the effect of economic policy uncertainty (EPU) on the financial reporting quality of US firms over 1999-2015. Using accruals-based earnings management as a proxy for financial reporting quality and the index of Baker et al. (2016) as an EPU measure we show that they exhibit a positive and significant association in accordance with the “lean against the wind” hypothesis. We also find a causal effect by employing the recently developed index of partisan conflict in the US Congress of Azzimonti (2018) as an instrument for EPU. In a cross-sectional analysis, we further show that the positive relationship between EPU and earnings management strengthens for riskier firms and firms belonging to politically sensitive industries. Overall, these results indicate that managers aim to provide outsiders with an improved financial picture of the company when EPU is high. These findings suggest that investors and regulators should be wary of firms’ financial reporting quality in periods of high economic policy uncertainty.

Keywords: earnings management, financial reporting quality, economic policy uncertainty (EPU), political sensitivity

JEL Classification: E44, G14, M41

Suggested Citation

Bermpei, Theodora and Kalyvas, Antonios Nikolaos and Neri, Lorenzo and Russo, Antonella, Does Economic Policy Uncertainty Matter for Financial Reporting Quality? Evidence from the United States (July 03, 2019). Available at SSRN: https://ssrn.com/abstract=3423646 or http://dx.doi.org/10.2139/ssrn.3423646

Theodora Bermpei

University of Sussex - School of Business, Management and Economics ( email )

Falmer, Brighton BN1 9SL
United Kingdom

Antonios Nikolaos Kalyvas (Contact Author)

Department of Banking and Finance, Southampton Business School, University of Southampton ( email )

Southampton, SO17 1BJ
United Kingdom

Lorenzo Neri

University of London - Birkbeck College ( email )

Malet Street
London, WC1E 7HX
United Kingdom

Antonella Russo

University of Greenwich - Accounting and Finance ( email )

United Kingdom

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