Earnings Management Methods and CEO Political Affiliation

Özgür Arslan-Ayaydin, James Thewissen and Wouter Torsin
Additional contact information
James Thewissen: Université catholique de Louvain, LIDAM/LFIN, Belgium

No 2022003, LIDAM Reprints LFIN from Université catholique de Louvain, Louvain Finance (LFIN)

Abstract: This paper examines whether CEO risk aversion – proxied by their political affiliation – explains the method used to manage earnings. We argue that, even though real earnings management can have severe long-term consequences for firm performance, Republican managers are likely to prefer real over accruals-based earnings management because the former incurs significantly lower litigation risk costs than the latter and is relatively more difficult to detect. Based on a sample of more than 20,000 firm-year observations, we find that firms led by Republican (i.e. more risk averse) CEOs tend to manage their earnings through real activities manipulation, while those led by Democratic (i.e. more risk taking) CEOs tend to favor accruals-based earnings management. We also show that the positive (negative) relation between Republican-leaning managers and real (accruals-based) is more positive (less negative) for CEOs whose compensation is more oriented towards risk-taking.

Keywords: Accruals earnings management; CEO Risk Aversion; Political affiliation; Political donations; Real activities manipulation (search for similar items in EconPapers)
JEL-codes: M41 (search for similar items in EconPapers)
Pages: 48
Date: 2022-01-01
Note: In: Comptabilite Contrôle Audit, 2022
References: Add references at CitEc
Citations:

There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it.

Related works:
Working Paper: Earnings Management Methods and CEO Political Affiliation (2021)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ajf:louvlr:2022003

Access Statistics for this paper

More papers in LIDAM Reprints LFIN from Université catholique de Louvain, Louvain Finance (LFIN) Voie du Roman Pays 34, 1348 Louvain-la-Neuve (Belgium). Contact information at EDIRC.
Bibliographic data for series maintained by Séverine De Visscher ().