Relation between earnings management and economic policy uncertainty: Evidence from around the world
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2021-07-13
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en
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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.
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Faculteit der Managementwetenschappen