Political elections, doctrine shifts, voting margins, and earnings management: the mediating role of capital markets and financial analysts coverage

This study investigates the relationship between political elections and earnings management using a large cross-country dataset of 310,275 firm-year observations from 85 countries over the period 2000–2020. We find that firms are more likely to engage in earnings management during election years. This effect is particularly pronounced when the doctrine of the newly elected political power (left, right, or center) differs from that of the previous one, suggesting that managers have stronger incentives to adjust reported earnings. Furthermore, a narrow voting margin between the winning and opposition parties intensifies earnings management behavior. We also explore the moderating role of capital markets and financial analysts coverage. Our findings indicate that firms listed on well-developed capital markets and those closely monitored by financial analysts are significantly less likely to engage in earnings management during election years, even when there is a change in political doctrine and a narrow voting margin. To the best of our knowledge, this is among the first studies to examine the impact of political elections on earnings management using a large, cross-country sample. Moreover, it is the first to highlight the constraining effect of capital markets and analyst coverage on managerial discretion during periods of political uncertainty. The findings remain robust across different measures and samples and are not sensitive to endogeneity concerns.