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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

Election periods are associated with uncertainty about future governmental structure and public policy, i.e., political uncertainty, leading to an increase in agency costs. As a response to rising agency costs, we find that in the year prior to a U.S. presidential election, 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. These findings add to the literature on how political forces can shape the nature of financial reporting by showing that accounting conservatism is driven by political concerns.

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