The Relationship between Economic Policy Uncertainty and Earnings Management with Emphasis on Life Cycle Stages

Document Type : Research Paper

Authors

1 Assistant professor of Accounting, Faculty of Humanities and Social Sciences, University of Kurdistan, Sanandaj, Kurdistan, Iran.

2 M.A. Student of Accounting, Faculty of Humanities and Social Sciences, University of Kurdistan, Sanandaj, Kurdistan, Iran.

10.22103/jdc.2021.18395.1166

Abstract

Objective: Because of economic shocks and fluctuations in recent years, the government faces indiscipline in economic policies and increase the uncertainty issue in economic policies. In such situations, on the firm-level managers deal with uncertainty too. Firms uncertainties affect managers estimates and decisions. On the other hand, when conditions of uncertainty exist, managers would face difficulties to meet forecasted earnings and have motivations to manipulate earnings to meet the market expectations. On the other hand Investors pay a great deal of attention to firms announced earnings for valuation and investment decisions and even the evaluation of managers' performance. Due to the probable effects of economic policy uncertainty on financial decisions and firms reporting quality, the purpose of this research is investigating the relationship between economic policy uncertainty, accrual base earnings management and then investigating moderation effects of life cycle stages of this relationship.
 Method: In order to achieve the research purpose, 125 companies (1068 firm-years) were selected from the companies listed on the Tehran Stock Exchange during the years 2013 to 2019 by systematic elimination sampling method. Research sample is excluded from financial firms, banks, insurance firms or firms with missing data. For measuring the earnings management, discretionary accruals model based on Kothari et al (2005) is used. Uncertainty economic policy index is created by using conditional variation autoregression to determine four macro volatilities then the results were combined with regression and principal component analysis to achieve a single index. In order to classify firms to different life cycle stages, Dickinson (2011) model is used.
 Results: As expected, results show that there is a positive relationship between policy uncertainty and accrual base earnings management and there are significant differences in strength of this relationship in different stages of company life cycle. In the introduction and growth stage this relationship is decreased and in mature stage the relationship is strong but, in the decline stage this relationship is not significant and we see a significant effect of life cycle stages as a moderator variable on the relationship between economic policy uncertainty and accrual base earnings management.
 Conclusion: These results show that by increasing the economic policy uncertainty, mangers have more chance and motivations to manage earnings. As economic policy uncertainty increased, we see more earnings management for firms in mature stage compared to firms in the introduction and growth stages. Maybe managers of the firms in mature stage have greater experience and knowledge about techniques applicable in their firm to manipulate earnings. Thereby, it is advisable for lenders and also for investor and analysts to pay a great deal of attention to the level of economic policy uncertainty and stages of company life cycle using earnings for valuation and manager performance evaluation. Also, in economic policy uncertainty situations auditors should consider risk of earnings management in planning and conducting an audit.

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References

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Journal of Development and Capital
Volume 6, Issue 2 - Serial Number 11
December 2021
Pages 71-91

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History

  • Receive Date: 23 October 2021
  • Revise Date: 26 November 2021
  • Accept Date: 01 December 2021

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