Document Type : Research Paper

Authors

1 M.A. Student in Accounting, University of Mazandaran, Babolsar, Iran.

2 Professor, Department of Accounting, Faculty of Economics and Administrative Sciences, University of Mazandaran, Babolsar, Iran.

10.22054/qjma.2025.82668.2627

Abstract

The significant impact of politics on the capital market has led to a substantial body of accounting and financial research being linked to political events. Accordingly, this study investigates the effect of presidential elections on earnings management, considering the moderating role of ownership structure. Data were collected from 122 companies listed on the Tehran Stock Exchange using a systematic elimination method over the period 2005-2022 and analyzed using multivariate regression. The findings indicate that presidential elections have a negative and significant effect on both accrual and real earnings management. Furthermore, when industries were classified based on their political characteristics, results showed that during presidential election years, firms in politically sensitive industries tend to manage earnings through accrual-based methods, while firms in non-political industries rely more on real earnings management. The study also finds that ownership structure—specifically, the proportion of institutional ownership—does not moderate the relationship between presidential elections and earnings management (accrual or real). These findings suggest that during presidential election periods, increased scrutiny from political and social institutions raises the perceived political costs for firms, leading to a reduction in both accrual and real earnings management.
 Earnings Management, Ownership Structure, Political Control, Political Cost, Presidential Election

Introduction

The prominent role of the government in emerging economies highlights its significance in the political and economic systems of these countries (Imani Brandagh & Hashemi, 2018). Furthermore, the impact of macro-political factors on the economic performance of markets, especially capital markets, is considered inevitable (Keshavarz & Rezaei, 2021; Imani Brandagh & Hashemi, 2018). Presidential elections, by creating broad political oversight over managers, such as public scrutiny aimed at judging the economic performance of the ruling political party, oversight by rival political parties seeking to uncover corruption and financial fraud, or increased internal control by the ruling party, raise the political costs for companies. As a result, managers may reduce earnings management to avoid accusations of corruption and financial misconduct (Kim & An, 2021). According to financial literature, these consequences are defined as "political costs," and their increase may create an environment that discourages earnings management (Goncalves et al., 2022; Kim & An, 2021).
On the other hand, presidential elections can generate significant political and economic uncertainty, prompting managers to increase earnings management in an attempt to neutralize the effects of these fluctuations (Goncalves et al., 2022; Moshtagh Kahnamoi et al., 2022).
This study aims to examine the impact of political costs in Iran’s economic environment, as a significant consequence of presidential elections driven by increased political oversight. The importance of this study in the context of Iran can be discussed from two perspectives: first, the intense political competition among factions and political parties, and second, Iran's state-dominated economy, which is heavily influenced by governmental or quasi-governmental institutions (Fakhari et al., 2021).

Literature Review

Kim and An (2021) argue that during presidential elections, increased political scrutiny raises political costs, prompting managers to reduce accrual-based earnings management to avoid accusations of financial misconduct. They attribute this to the easier detection of accrual items compared to real activities (Kim & An, 2021; Fakhari et al., 2015). Similarly, Jain et al. (2021), in their study of nine U.S. presidential election cycles (1980–2012), found that companies manipulate earnings by overproducing in pre-election years and reducing sales-related activities during election years. They also found that firms with higher agency costs reduce real earnings management during elections, while larger firms increase real earnings management in response to political-economic policies and economic uncertainty.

Methodology

This study examines the impact of presidential elections on earnings management (both accrual-based and real) and the moderating role of ownership structure, using multivariate regression over an 18-year period (2005–2022). The data were analyzed using Stata software (version 14). In line with common practices in accounting research, all continuous variables were winsorized at the 1st and 99th percentiles.

Results

The findings indicate that presidential elections have a significant negative impact on both types of earnings management—accrual-based and real. Specifically, during election years, accrual-based earnings management decreases by 1.4%, and real earnings management decreases by 1.6%. Additionally, the ownership structure (institutional ownership) does not play a moderating role in the effect of presidential elections on earnings management. Furthermore, the findings reveal that the type of earnings management differs between politically connected and non-politically connected firms. Politically connected firms reduce accrual-based earnings management due to its high detectability and the increased political costs associated with it (Kim & An, 2021). However, no significant effect was observed on real earnings management, as the political costs of real earnings management are not as high (Kim & An, 2021). For non-politically connected firms, the findings were precisely the opposite. Consistent with the overall results, the ownership structure did not have a moderating effect in either group examined.

Conclusion

The findings indicate that accounting earnings are influenced by the political factor of presidential elections. Additionally, institutional ownership does not affect this relationship. In Iran's state-dominated economy, presidential elections increase political scrutiny from rival political parties, the ruling party, and society, thereby raising political costs. As a result, managers are driven to reduce both accrual-based and real earnings management to avoid financial accusations. Furthermore, politically connected firms refrain from accrual-based earnings management during presidential elections due to its high detectability and the associated political costs; however, they do not react similarly to real earnings management. This behavior stems from heightened political oversight and the increased risk of being accused of financial misconduct (Kim & An, 2021).

Keywords

Main Subjects

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