Elections and Discretionary Accruals: Evidence from 2004

Authors


  • We thank William Baber, Richard Frankel, Wayne Guay (the discussant), Paul Healy, S. P. Kothari, Krishna Palepu, Douglas Skinner (the editor), Rodrigo Verdi, Ross Watts, an anonymous referee, and seminar participants at Georgetown University, the 2009 Journal of Accounting Research Conference, and Massachusetts Institute of Technology for helpful comments; Harvard University and Massachusetts Institute of Technology for financial support; and the division of research at Harvard Business School for research assistance. Any errors are our responsibility. This paper was previously circulated under the title: “Accounting Information as Political Currency.”

ABSTRACT

We examine the accrual choices of outsourcing firms with links to U.S. congressional candidates during the 2004 elections, when corporate outsourcing was a major campaign issue. We find that politically connected firms with more extensive outsourcing activities have more income-decreasing discretionary accruals. Further, relative to adjacent periods, the evidence is concentrated in the two calendar quarters immediately preceding the 2004 election, consistent with heightened incentives for firms to manage earnings during the election season. The incentives can be attributed to donor firms' concerns about the potentially negative consequences of scrutiny over outsourcing for themselves and for their affiliated candidates.

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