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Does Economic Policy Uncertainty Matter for Financial Reporting Quality? Evidence from the United States

Bermpei, Theodora and Kalyvas, Antonios and Neri, Lorenzo and Russo, Antonella (2021) 'Does Economic Policy Uncertainty Matter for Financial Reporting Quality? Evidence from the United States.' Review of Quantitative Finance and Accounting. ISSN 0924-865X

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Abstract

We examine the effect of economic policy uncertainty (EPU) on the financial reporting quality of US firms over 1999-2015. We use accruals-based earnings management as a proxy for financial reporting quality and the index of Baker et al. (2016) as an EPU measure to show that they exhibit a positive and significant association. We also find a causal effect by employing three political polarization instruments for EPU. In a cross-sectional analysis, we further show that the positive relationship between EPU and earnings management strengthens for firms operating in politically sensitive industries, for firms in more financial distress, and during recessionary periods. We also provide evidence that increased financial constraints facilitate the positive relationship between EPU and earnings management. These findings are robust to the use of alternative measures of economic policy uncertainty and when we employ real earnings management as a dependent variable. These results indicate that managers aim to provide outsiders with an improved financial position of the company when EPU is high. Our findings suggest that investors, analysts, creditors, and regulators should be wary of firms’ financial reporting quality in periods of high economic policy uncertainty.

Item Type: Article
Uncontrolled Keywords: Earnings management, Economic policy uncertainty (EPU), Financial reporting quality, Political sensitivity
Divisions: Faculty of Social Sciences > Essex Business School
Faculty of Social Sciences > Essex Business School > Essex Finance Centre
Depositing User: Elements
Date Deposited: 03 Aug 2021 13:29
Last Modified: 01 Sep 2021 11:15
URI: http://repository.essex.ac.uk/id/eprint/30796

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