Purpose –The purpose of this paper is to investigate if, when a firm is politically connected, the perspective of an incoming election has the ability to affect the magnitude of earnings management in its financial statements. Design/methodology/approach – We identify Municipalities Owned Enterprises (MSOEs) as a typical example of politically connected firms and we measure the magnitude of Earnings management over a 6 years period including two rounds of elections held in the controlling Municipality. The methodology used to measure Earnings Management is the one developed by (Stubben, 2010) who develops a model of changes in accounts receivable to measure earnings management through revenues instead of earnings. We also use the frequency distribution approach as in Burgstahler and Dichev (1997), as a check method. Findings – We found evidence of an increase in earnings management activity in the last financial statements published before the election held in the controlling municipalities. Originality/Limitations – As reported by previous research (Ramanna & Roychowdhury, 2010), “use of accounting discretion to manage political costs is potentially more evolved than currently discussed in the literature”. As to the specific topic of this paper, this study is the first to examine the relation between election and earnings management for a sample of European politically connected firms, namely Italian firms. Nonetheless, it suffers from the limitations that it may derive from the peculiarity of a single national environment. Practical implications – This study fills a gap in the literature by contributing to the development of knowledge by responding to the call of Ramanna and Roychowdhury (2010). Therefore, our paper contributes to (i) improving the integrity of elections; (ii) reducing corruption and inappropriate use of SOEs (IFAC, 2015); (iii) increasing the level of control in «election years» , especially in the perspective of consolidation with the controlling public sector entity. It sheds light on the reliability of the financial statements of an extremely peculiar kind of entities that have nowadays a significant role in the economic life of many countries (OECD, 2014). Keywords – Earnings management, Local Election, Politically connected firms, Municipalities Owned Enterprises.
Key-Word: Issues in International Accounting
