Political stability, political rights and earnings management: some international evidence

This study aims to examine the impact of political stability and political rights on firm-level earnings (both accrual-based and real) management.,The authors develop models that link political stability, political rights, and the interplay between the two and earnings (both accrual-based and real) management. The authors analyze 63,872 firm-year observations of publicly listed, non-financial, firms drawn from 39 countries, for the period 1995 to 2016.,The authors find that political stability (political rights) attenuates (accentuates) accrual-based earnings management; political rights (political stability) accentuates (have no effect on) real earnings management; and the association between political rights and real earnings management is more pronounced in countries with better political stability.,The findings imply that users of financial statements should take cognizance of a country’s ambient political environment in assessing the potential for earnings management by firms.,No prior research examined the role of political forces in shaping firm-level earnings management behavior in a cross-country setting.