Political elections uncertainty and earnings management: Does firm size really matter?

This study provides evidence on whether political elections uncertainty is associated with firms’ earnings management in election years in 15 European countries, using a sample of 16,868 firm–year observations from 3,096 unique firms in the period 2011–2018. We find that earnings management increases in uncertain political environments. This occurs mostly in years of extreme elections uncertainty as in the case of elections won by a margin of less than 5%, including close calls with a change of the ruling party to a different political spectrum. Firms increase earnings management activity to decrease earnings except in the case of SMEs who behave conversely by increasing earnings, arguably on the basis of increased scrutiny risk.