US political sanctions and earnings management

Abstract

This study investigates the impact of US political sanctions on the earnings management practices of Iranian listed firms. Employing a difference-in-differences methodology and utilizing empirical data from 2013 to 2022, the study demonstrates that sanctions do not significantly influence accrual-based earnings management. However, it reveals a robust positive association between sanctions and the extent of real earnings management. This finding suggests that, during economic downturns induced by sanctions, firms may find employing real earnings management strategies more advantageous than accrual-based methods. The study further substantiates that the sanction-induced increase in real earnings management is more pronounced under conditions of weaker corporate governance and higher earnings management incentives, such as the desire to avoid reporting earnings decreases. These results remain robust under various sensitivity analyses. This research contributes to the growing body of empirical literature on the consequences of sanctions by illustrating that economic downturns triggered by political sanctions enhance the substitution relationship between real and accrual earnings management.