Can we trust the accounting discretion of firms with political money contributions? Evidence from U.S. IPOs

Kallias, Antonios ORCID: https://orcid.org/0000-0002-9431-7222, Kallias, Konstantinos ORCID: https://orcid.org/0000-0002-9431-7222 and Zhang, Song 2022. Can we trust the accounting discretion of firms with political money contributions? Evidence from U.S. IPOs. Journal of Accounting and Public Policy 41 (6) , 106999. 10.1016/j.jaccpubpol.2022.106999

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Abstract

Using hand-collected data from the U.S., we examine the influence of political money contributions (PMCs) on IPO financial reporting. Unraveling the conflicting managerial incentives, we develop and test three distinct hypotheses whereby accounting discretion is utilized to downplay, embellish, or truthfully impart the PMC firm’s prospects. Consistent with the last two hypotheses, we document income-increasing reporting. The effects are strongest for firms sensitive to policy outcomes, and least affected by contemporaneous political events. Post-issue analysis shows that at-issue discretionary accruals systematically predict future accounting performance but are unrelated to stock returns. Survival analysis indicates a lower probability of IPO failure. Robust to a battery of checks, our results support the value-relevance of financial information and a novel use of accounting discretion as a means of signaling expected political gains.

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Business (Including Economics)
Publisher:	Elsevier
ISSN:	0278-4254
Date of First Compliant Deposit:	8 July 2022
Date of Acceptance:	9 June 2022
Last Modified:	06 May 2023 18:37
URI:	https://orca.cardiff.ac.uk/id/eprint/151166

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