The effects of government policies during the COVID-19 pandemic on earnings management

Abstract

This study examines the effects of government policies in response to the COVID-19 pandemic on management decisions on earnings. While existing studies usually treat a crisis as a single event, in this study, we disentangle the two contrasting forces typically present during a crisis, one increasing and the other decreasing the severity of the crisis. We use the government policy BSG index issued by the University of Oxford COVID-19 Project to identify these types and to measure the extent of the policies issued by governments worldwide during the COVID-19 pandemic that affect the uncertainty about the future of business and the economy. Our sample includes public firms from 74 countries, with a total observation of 57,758 firm-years from 2020 to 2022. We find that different policies have different effects on earnings management. Specifically, our results show that containment policies reduce earnings management while economic policies increase earnings management. This study contributes to the literature on how government policies and prolonged economic shocks, such as the COVID-19 pandemic, affect earnings management. We believe that our ability to disentangle the two contrasting forces in a crisis and separately examine their effects on earnings management is the novelty of this study. Our results provide policymakers with insights into the impact of the governments’ policies on management decisions, especially on reported earnings.