Policy Uncertainty and Accounting Quality

The Accounting Review

54 Pages Posted: 16 Jul 2020 Last revised: 7 Mar 2023

See all articles by Sadok El Ghoul

Sadok El Ghoul

University of Alberta - Campus Saint-Jean

Omrane Guedhami

University of South Carolina - Moore School of Business

Yongtae Kim

Santa Clara University - Leavey School of Business

Hyo Jin Yoon

University of Texas at El Paso

Date Written: June 23, 2020

Abstract

Using data from 19 countries over the 1990–2015 period, we examine how economic policy uncertainty (EPU) affects accounting quality. We find that accounting quality, measured based on Nikolaev’s (2018) model, increases during periods of high policy uncertainty. This relation is confirmed by the negative association between EPU and performance-adjusted discretionary accruals in a multivariate setting, and it extends to various alternative measures of earnings properties. We also find that the positive relation between EPU and accounting quality is more pronounced for government-dependent firms and firms with higher political risk. Additional analyses based on institutional investors’ trading behavior, media freedom, and press circulation suggest that market participants’ attention is a mechanism through which EPU affects accounting quality. Further, we find evidence that high accounting quality can mitigate the negative effects of EPU on corporate investment and valuation.

Keywords: economic policy uncertainty; accounting quality; earnings management; investor attention; monitoring; press freedom

Suggested Citation

El Ghoul, Sadok and Guedhami, Omrane and Kim, Yongtae and Yoon, Hyo Jin, Policy Uncertainty and Accounting Quality (June 23, 2020). The Accounting Review, Available at SSRN: https://ssrn.com/abstract=3634315

Sadok El Ghoul

University of Alberta - Campus Saint-Jean ( email )

Edmonton, Alberta T6G 2R3
Canada
780-465-8725 (Phone)
780-465-8760 (Fax)

Omrane Guedhami

University of South Carolina - Moore School of Business ( email )

Columbia, SC
United States

Yongtae Kim (Contact Author)

Santa Clara University - Leavey School of Business ( email )

500 El Camino Real
Santa Clara, CA California 95053
United States
(408) 554-4667 (Phone)
(408) 554-2331 (Fax)

Hyo Jin Yoon

University of Texas at El Paso ( email )

500 W University Ave
El Paso, TX 79902
United States

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