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

Antonios Kallias, Konstantinos Kallias*, Song Zhang

*Corresponding author for this work

    Research output: Contribution to journalArticlepeer-review

    Abstract

    Using hand-collected data from the U.S., we examine the influence of political money contributions (PMC) 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.
    Original languageEnglish
    Article number106999
    Number of pages26
    JournalJournal of Accounting and Public Policy
    Volume41
    Issue number6
    DOIs
    Publication statusPublished - 14 Nov 2022

    Keywords

    • Initial public offerings
    • Discretionary accruals
    • Signaling
    • Political connections
    • IPO performance

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