Relation between earnings management and economic policy uncertainty: Evidence from around the world

Abstract

Concerns about economic policy uncertainty (EPU) and earnings management have intensified after the global financial crisis of 2008 and various accounting scandals, such as Enron and WireCard. The purpose of this study is to examine the relation between earnings management and EPU. This study distinguishes between two forms of earnings management: accrual-based and real. The sample consists of 101,436 firm-year observations spread across 34,508 different firms in 20 countries over the period 2008-2020. Contrary to prior literature, the main results show that there is no significant effect of EPU on accrual-based earnings management and a negative effect of EPU on real earnings management. This study also highlights the importance of controlling for different accounting standards when examining the effects of EPU on earnings management. Consistent with prior studies, the results show that EPU leads to higher real earnings management for IFRS firms, mainly through discretionary expenses, and less accrual-based earnings management for non-IFRS firms. This highlights the importance of controlling for other institutional and macro-economic factors in future research when examining earnings management and EPU.