Political connections and earnings management in emerging markets – new evidence

PurposeThis study examines the relationship between political connections and earnings management in Iran as an emerging market, focusing on the moderating roles of audit quality and conditional conservatism. The research explores how governance mechanisms can influence financial transparency and mitigate manipulative financial practices in politically connected firms.Design/methodology/approachThe study employs panel data from 221 firms listed on the Tehran Stock Exchange (TSE) between 2017 and 2021. Generalised least squares (GLS) regression analyses political connections' impact on accrual-based and real earnings management. Audit quality and conditional conservatism are tested as moderating variables to assess their influence on the relationship between political connections and earnings management.FindingsThe results indicate that political connections are positively associated with accrual-based earnings management but negatively linked to real earnings management. High-quality audits significantly reduce real earnings manipulation but may inadvertently enable accrual-based earnings management. Contrary to expectations, conditional conservatism does not significantly moderate the relationship between political connections and earnings management.Research limitations/implicationsThe findings highlight the importance of robust governance frameworks and enhanced audit practices in curbing opportunistic financial behaviour in politically connected firms. Policymakers in emerging markets should address governance gaps and promote sustainable financial reporting standards to reduce the adverse effects of political influence on corporate behaviour.Originality/valueThis study contributes to the literature by providing a comparative perspective on the intersection of political influence, governance mechanisms and financial practices in emerging markets. It highlights the dual effects of political connections on earnings management, offering novel insights into firms' governance challenges in developing economies. The research also emphasises the need for tailored financial reporting frameworks in politically connected firms, mainly where state intervention and political considerations play a significant role in corporate decision-making.