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Air pollution, political costs, and earnings management

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  • Yang, Mian
  • Tang, Wenliang

Abstract

This paper examines how firms that pollute the air react to political costs induced by air pollution. We use detailed data on accounting, air pollution and meteorological factors to investigate earnings management activities of the firms. We find that the firms engage in income-decreasing earnings management in response to air pollution. A one standard deviation increase in Air Quality Index (19.4) causes an increase in income-decreasing discretionary accruals equal to 1.20% of total assets. We observe that income-decreasing earnings management activities are only induced when air pollution reaches the “lightly polluted” level. We also find evidence that the firms are particularly sensitive to political costs around the release of annual reports. This paper contributes to a more accurate assessment of the undesirable impacts of air pollution, and adds to the existing body of literature on political cost hypothesis as well.

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  • Yang, Mian & Tang, Wenliang, 2022. "Air pollution, political costs, and earnings management," Emerging Markets Review, Elsevier, vol. 51(PA).
    • Handle: RePEc:eee:ememar:v:51:y:2022:i:pa:s1566014121000753
    DOI: 10.1016/j.ememar.2021.100867
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    More about this item

    Keywords

    Air pollution; Political costs; Earnings management; Polluting industries;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting
    • Q53 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Air Pollution; Water Pollution; Noise; Hazardous Waste; Solid Waste; Recycling

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