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Political Uncertainty and Accounting Conservatism: Evidence from the U.S. Presidential Election Cycle

Dai, Lili and Ngo, Phong T. H. (2013): Political Uncertainty and Accounting Conservatism: Evidence from the U.S. Presidential Election Cycle.

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Abstract

We document a positive association between political uncertainty and accounting conservatism. In the year prior to a U.S. presidential election, on average, accounting conservatism increases by nearly 20 percent. This election year effect is stronger when the election is closer, when the incumbent president is not seeking re-election, and when the incumbent party is Democrat. In the post-election year, conservatism is lower relative to the non-election period when the incumbent party wins, but remains higher under an opposition party victory. Moreover, the election year effect varies across industries and companies, and remains unchanged under different empirical specifications. For example, the impact of an election is greater for politically sensitive industries and for companies with less anti-takeover provisions, and is robust when we control for the business cycle. Collectively, we show the political process is important in determining accounting choices through the uncertainty channel.

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