Abstract

This study examines the impact of the U.S. withdrawal from the Joint Comprehensive Plan of Action (JCPOA) as a geopolitical event on conditional conservatism and investigates the roles of state ownership and financial constraints in explaining cross-sectional differences in firms’ responses to this event. To this end, a difference-in-differences approach is employed by comparing firms’ behavior during the three-year period before and the three-year period after the event. The sample consists of 168 firms and 1,008 firm-year observations. The results indicate that the U.S. withdrawal from the JCPOA is associated with a significant increase in conditional conservatism. Further analyses across different time horizons reveal that firms’ responses emerged gradually, with the medium-term effect being stronger than the short-term effect. The largest increase in conditional conservatism is observed in the years following the event. The findings also show that the effect of the JCPOA withdrawal is weaker among state-owned firms but stronger among financially constrained firms.

Keywords: Conditional Conservatism, U.S. Withdrawal from the JCPOA Geopolitical Event, State Ownership, Financial Constraints, Difference-in-Differences.

1. Introduction

Geopolitical events have increasingly become an important source of uncertainty for firms, affecting investment decisions, financing conditions, risk perceptions, and corporate reporting behavior. Prior accounting research suggests that heightened uncertainty can alter managers’ reporting incentives and increase stakeholders’ demand for timely recognition of economic losses (Watts, 2003; LaFond & Watts, 2008). Conditional conservatism, which refers to the asymmetric and timelier recognition of bad news relative to good news, is often viewed as an efficient reporting mechanism that mitigates information asymmetry, enhances contracting efficiency, and reduces agency conflicts. The U.S. withdrawal from the Joint Comprehensive Plan of Action (JCPOA) in 2018 represents a major geopolitical shock for Iranian firms. Through its effects on economic uncertainty, financing conditions, trade relations, exchange rate volatility, and inflationary pressures, this event created an environment in which the demand for conservative financial reporting may have changed substantially. While prior studies have examined the economic consequences of geopolitical risk, limited evidence exists regarding its impact on accounting conservatism, particularly in emerging markets. This study investigates whether the U.S. withdrawal from the JCPOA affected firms’ conditional conservatism and whether this effect varies across firms with different institutional and financial characteristics. Specifically, the study examines the moderating roles of state ownership and financial constraints. Furthermore, unlike prior studies that focus solely on average treatment effects, this study evaluates both short-term and medium-term responses to identify how firms’ reporting behavior evolves over time following a geopolitical shock.

Research Hypotheses

H1: The U.S. withdrawal from the JCPOA increases firms’ conditional conservatism.

H2: The effect of the U.S. withdrawal from the JCPOA on conditional conservatism is weaker among state-owned firms.

H3: The effect of the U.S. withdrawal from the JCPOA on conditional conservatism is stronger among financially constrained firms.

2. Literature Review

Conditional conservatism is primarily grounded in contracting, information asymmetry, and agency theories. Prior research suggests that conservatism enhances contracting efficiency by facilitating timely loss recognition and reducing information asymmetry between managers and external stakeholders (Watts, 2003; LaFond & Watts, 2008). Geopolitical events can increase uncertainty, financing frictions, and default risk, thereby strengthening demand for more conservative financial reporting. However, firms may respond differently to such shocks. State-owned firms often benefit from government support and easier access to financing, reducing incentives to increase conservatism, whereas financially constrained firms face stronger creditor pressure and greater information asymmetry, making conservative reporting more valuable. Nevertheless, agency theory suggests that managers under severe financial pressure may delay the recognition of bad news to avoid adverse economic consequences. Therefore, the overall effect of geopolitical shocks on conditional conservatism remains an empirical issue.

3. Methodology

This study employs a quasi-experimental research design based on a difference-in-differences (DiD) approach. The research setting is built around the U.S. withdrawal from the JCPOA in 2018, which serves as an exogenous geopolitical shock affecting Iranian firms. The analysis compares firms’ reporting behavior during the three-year period before the event (2015-2017) and the three-year period after the event (2018-2020). This design allows the study to isolate changes in conditional conservatism associated with the geopolitical event while controlling for time-invariant firm characteristics. The final sample consists of 168 firms and 1,008 firm-year observations. Financial institutions, banks, leasing companies, and other regulated financial firms are excluded because of their distinct reporting environments. All sample firms remained listed throughout the event window and had a fiscal year ending on Esfand 29 in the Iranian calendar. In addition to the baseline DiD model, dynamic specifications are estimated to examine short-term and medium-term effects. These analyses allow the study to determine whether firms’ responses emerged immediately after the event or evolved gradually over time. Firm fixed effects and clustered standard errors are employed to address potential econometric concerns. Furthermore, several supplementary analyses, including pre-trend examinations, are conducted to validate the identification strategy and assess the parallel trends assumption.

4. Results and Discussion

The findings indicate that the U.S. withdrawal from the JCPOA significantly increased firms’ conditional conservatism, consistent with contracting and information asymmetry theories. Dynamic analyses show that the effect emerged gradually, strengthened during the first two years after the event, and weakened thereafter, suggesting that firms responded not only to the initial geopolitical shock but also to its evolving economic consequences. The results further reveal considerable cross-sectional variation. The increase in conditional conservatism is weaker among state-owned firms, with the buffering role of state ownership becoming more evident over time. In contrast, financially constrained firms exhibit a stronger and progressively increasing response, indicating a greater reliance on conservative reporting to mitigate creditor concerns and information asymmetry under persistent economic pressures. Additional robustness and pre-trend tests support the validity of the findings and the parallel trends assumption.

5. Conclusion

This study examines the effect of the U.S. withdrawal from the JCPOA on firms’ conditional conservatism using a difference-in-differences framework. The findings indicate that geopolitical shocks can significantly influence financial reporting behavior by increasing firms’ incentives to recognize bad news more promptly. The study contributes to the literature in several ways. First, it extends the growing literature on geopolitical risk by documenting its impact on accounting conservatism. Second, it highlights the importance of firm heterogeneity by demonstrating that state ownership and financial constraints shape firms’ reporting responses to geopolitical events. Third, by distinguishing between short-term and medium-term effects, the study provides new evidence on the temporal dynamics of accounting responses to major political and economic shocks. Overall, the findings suggest that the financial reporting consequences of geopolitical events are not uniform across firms or over time. Instead, they depend on firms’ institutional environments, financing conditions, and ability to absorb economic uncertainty. These insights are particularly relevant for investors, creditors, regulators, and policymakers operating in environments characterized by elevated geopolitical risk.