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Accrual-based and real earnings management and political connections

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  • Braam, Geert
  • Nandy, Monomita
  • Weitzel, Utz
  • Lodh, Suman

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.

Suggested Citation

  • Braam, Geert & Nandy, Monomita & Weitzel, Utz & Lodh, Suman, 2015. "Accrual-based and real earnings management and political connections," The International Journal of Accounting, Elsevier, vol. 50(2), pages 111-141.
  • Handle: RePEc:eee:accoun:v:50:y:2015:i:2:p:111-141
    DOI: 10.1016/j.intacc.2013.10.009
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    Cited by:

    1. Habib, Ahsan & Muhammadi, Abdul Haris & Jiang, Haiyan, 2017. "Political Connections and Related Party Transactions: Evidence from Indonesia," The International Journal of Accounting, Elsevier, vol. 52(1), pages 45-63.
    2. repec:eee:jbrese:v:83:y:2018:i:c:p:138-150 is not listed on IDEAS
    3. Hamidreza Vakilifard & Mahboobe Sadat Mortazavi, 2016. "The Impact of Financial Leverage on Accrual-Based and Real Earnings Management," International Journal of Academic Research in Accounting, Finance and Management Sciences, Human Resource Management Academic Research Society, International Journal of Academic Research in Accounting, Finance and Management Sciences, vol. 6(2), pages 53-60, April.
    4. repec:ers:journl:v:xx:y:2017:i:3b:p:491-506 is not listed on IDEAS
    5. Masahiro Enomoto, 2018. "Cross-Country Research on Earnings Quality: A Literature Review and Future Opportunities," Discussion Paper Series DP2018-06, Research Institute for Economics & Business Administration, Kobe University.
    6. repec:eee:accoun:v:53:y:2018:i:1:p:33-53 is not listed on IDEAS

    More about this item

    Keywords

    Real earnings management; Accrual-based earnings management; Substitution of earnings management strategies; Political connection; Public monitoring;

    JEL classification:

    • M4 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • D72 - Microeconomics - - Analysis of Collective Decision-Making - - - Political Processes: Rent-seeking, Lobbying, Elections, Legislatures, and Voting Behavior
    • F5 - International Economics - - International Relations, National Security, and International Political Economy

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