Accrual-based and real earnings management and political connections

Geert Braam, Monomita Nandy, Utz Weitzel and Suman Lodh ()

The International Journal of Accounting, 2015, vol. 50, issue 2, 111-141

Abstract: This study examines whether the trade-off between real and accrual-based management strategies differs between firms with and without political connections. We argue that politically connected firms are more likely to substitute real earnings management for accrual-based earnings management than non-connected firms. Although real earnings management is more costly, we expect that politically connected firms prefer this strategy because of its higher secrecy and potential to mask political favors. Using a unique panel data set of 5493 publicly traded firms in 30 countries, our results show that politically connected firms are more likely to substitute real earnings management strategies for accrual-based earnings management strategies than non-connected firms. We also find that when public monitoring and, therefore, the risk of detection increases, politically connected firms are more likely to resort to less detectable real earnings management strategies. Our finding that political connections play a significant role in the choice between accrual-based and real earnings management strategies suggests that focusing only on accrual-based measurements underestimates the total earnings management activities of politically connected firms.

Keywords: Real earnings management; Accrual-based earnings management; Substitution of earnings management strategies; Political connection; Public monitoring (search for similar items in EconPapers)
JEL-codes: D72 F5 M4 M41 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (39)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:accoun:v:50:y:2015:i:2:p:111-141

DOI: 10.1016/j.intacc.2013.10.009

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