Policy Uncertainty, Earnings Management and the Role of Political Connections

Abstract

Extant literature engages with the question how political uncertainty shapes firms’ financial disclosures and earnings management choices. We show that political connections are an efficient risk management response to political uncertainty. More specifically, we show that lobbying moderates the positive association of political uncertainty and earnings management. As such, we contribute to the vibrant field of research at the intersection of political sciences and business economics. Our study is robust to different specifications of earnings management, potential self-selection bias as well as omitted variable concerns.

Keywords: Policy uncertainty, earning management, political connections, lobbying