Does macroeconomic uncertainty (really) influence managers’ earnings management?
Date
2024-05-28
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Journal of Corporate Accounting & Finance
Abstract
We revisit the literature on using the economic policy uncertainty index (EPU) to estimate macroeconomic uncertainty1. The extant literature has shown mixed evidence on whether macroeconomic uncertainty affects accounting quality. The EPU reflects unrepresentative political risks and thus is expected to substantially mismeasure economic uncertainty. This study investigates the association between macro uncertainty and earnings management by utilizing a novel and more unbiased measure of macro uncertainty, the gross domestic product (GDP) dispersion, and the volatility index (VIX). We find that firms engage more in earnings management when macroeconomic uncertainty is high, consistent with the notion that investors’ attention is limited due to information asymmetry providing earnings management opportunities. We also document that managers’ earnings management not only involves discretionary accruals but also real earnings management. The results are robust to controlling for firm characteristics, to an alternative measure of macroeconomic uncertainty, and to the endogeneity concern.
Description
This is the peer reviewed version of the following article: Cho, K. H., & Patil, B. (2024). Does macroeconomic uncertainty (really) influence managers’ earnings management? Journal of Corporate Accounting & Finance, 1–13. https://doi.org/10.1002/jcaf.22748, which has been published in final form at https://doi.org/10.1002/jcaf.22748. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions. This article may not be enhanced, enriched or otherwise transformed into a derivative work, without express permission from Wiley or by statutory rights under applicable legislation. Copyright notices must not be removed, obscured or modified. The article must be linked to Wiley’s version of record on Wiley Online Library and any embedding, framing or otherwise making available the article or pages thereof by third parties from platforms, services and websites other than Wiley Online Library must be prohibited.
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Keywords
earnings management, GDP dispersion, macroeconomic uncertainty, VIX
Citation
Cho, K. H., & Patil, B. (2024). Does macroeconomic uncertainty (really) influence managers’ earnings management? Journal of Corporate Accounting & Finance, 1–13. https://doi.org/10.1002/jcaf.22748