Policy uncertainty and real activities manipulation: evidence from Brexit

Naser Makarem (), Harjinder Singh (), Nigar Sultana () and Darren Henderson ()
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Naser Makarem: University of Aberdeen
Harjinder Singh: Curtin University
Nigar Sultana: Curtin University
Darren Henderson: Wilfrid Laurier University

Review of Quantitative Finance and Accounting, 2023, vol. 61, issue 4, No 8, 1415-1440

Abstract: Abstract Brexit exposed the UK to substantial policy uncertainty that could affect the performance and behavior of British firms. We examine the impact of Brexit as an exogenous shock to policy uncertainty on real activities manipulation by British firms. Using several measures of real activities manipulation and a difference-in-differences design, we compare the earnings management of firms most adversely affected by Brexit uncertainty (affected firms) to other firms. Our results indicate that the affected firms exhibit higher real activities manipulation after the Brexit vote and we also find that they demonstrate similarly higher accruals management. Our findings suggesting that policy uncertainty induces the costly practice of real activities manipulation are relevant to various stakeholders including policymakers and financial statements users.

Keywords: Brexit; Policy uncertainty; Real activities manipulation; Earnings management (search for similar items in EconPapers)
JEL-codes: M41 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.1007/s11156-023-01189-6

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