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Political Uncertainty and Accounting Conservatism: Evidence from the U.S. Presidential Election Cycle

Lili Dai and Phong Ngo

MPRA Paper from University Library of Munich, Germany

Abstract: We document a positive association between political uncertainty and accounting conservatism. In the year prior to a U.S. presidential election, on average, accounting conservatism increases by nearly 20 percent. This election year effect is stronger when the election is closer, when the incumbent president is not seeking re-election, and when the incumbent party is Democrat. In the post-election year, conservatism is lower relative to the non-election period when the incumbent party wins, but remains higher under an opposition party victory. Moreover, the election year effect varies across industries and companies, and remains unchanged under different empirical specifications. For example, the impact of an election is greater for politically sensitive industries and for companies with less anti-takeover provisions, and is robust when we control for the business cycle. Collectively, we show the political process is important in determining accounting choices through the uncertainty channel.

Keywords: accounting conservatism; political uncertainty; election cycle (search for similar items in EconPapers)
JEL-codes: D72 G34 G38 M41 (search for similar items in EconPapers)
Date: 2013-01-04
New Economics Papers: this item is included in nep-cdm and nep-pol
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