Political uncertainty and earnings management: Evidence from Latin American countries

Abstract Purpose: This article aims to examine whether political uncertainty affects the accounting choices of firms’ managers in the sense of practicing earnings management through discretionary accruals. Originality/value: The research is original for providing evidence on the direction of earnings management practice following periods of political uncertainty and considering emerging countries in Latin America. The study helps signal to capital market agents in those countries the impact of political uncertainty on the quality of accounting aggregates. Design/methodology/approach: The final sample comprised 352 firms (3,005 observations-year), considering the period 1998-2018. Political uncertainty was a proxy for the countries’ presidential election years. At the same time, earnings management was captured by discretionary accruals estimated according to the Jones’ model (1991) modified by Dechow et al. (2012). Multiple linear regression with estimation by System Generalized Method of Moments (Sys-GMM) guided the tests. Findings: It was found that presidential election periods are associated with managers’ decisions to increase earnings by positive discretionary accruals, allowing us to infer that political uncertainty impacts managers’ accounting choices regarding earnings management. The results proved to be robust to different test alternatives. The findings have practical implications for agents who use accounting information as an informational signal in their decisions, whether from the perspective of investors (current shareholders or potential shareholders) or the perspective of other stakeholders associated with the firm (employees, suppliers etc.). Resumo Objetivo: Este artigo tem como objetivo examinar se a incerteza política afeta as escolhas contábeis de gestores de firmas no sentido de praticarem o gerenciamento de resultados por meio de accruals discricionários. Originalidade/valor: A pesquisa é original por fornecer evidências sobre a direção da prática de gerenciamento de resultados seguindo períodos de incerteza política e considerando países emergentes da América Latina. O estudo é útil por sinalizar aos agentes dos mercados de capitais daqueles países o impacto da incerteza política na qualidade dos agregados contábeis. Design/metodologia/abordagem: A amostra final ficou constituída por 352 firmas (3.005 observações-ano), considerando-se o período de 1998 a 2018. Incerteza política teve como proxy os anos de eleições presidenciais d