The Use of Financial Reporting Discretion and Political Visibility: Evidence from the Iran Threat Reduction Act

• In Event: Political Issues and Foreign Investment

Abstract

I examine how firms use their financial reporting discretion in response to an increase in political visibility following mandated disclosures from the Iran Threat Reduction Act (ITRA). I find that firms that make ITRA disclosures and thus experience increased political scrutiny suffer a negative, abnormal market reaction relative to a set of similar control firms that do not make ITRA disclosures. Furthermore, I find that firms making ITRA disclosures take significant, income-decreasing discretionary accruals and their annual filings have a significantly more negative tone and complexity. These results are consistent with the political cost hypothesis and demonstrate firms’ ability to use financial reporting discretion to minimize the expected costs associated with an exogenous increase in political visibility.

Author

• Chase Michael Potter, Washington University in Saint Louis