Managerial Political Spending Choice and Earnings Management
Review of Pacific Basin Financial Markets and Policies, 2020
36 Pages Posted: 14 Nov 2020
Date Written: September 26, 2020
This study investigates whether and how the CEOs’ political spending choice is associated with their earnings management behavior. Using a sample of 8,502 firm-year observations from S&P 500 firms during 1993-2012 over 10 election cycles, we provide empirical evidence that CEOs making political spending mainly through the corporate channel to recipients advised by the firms’ own political action committees engage in less earnings management than those making political spending mainly through the private channel to their own selected recipients. This finding suggests that CEOs’ political spending choice of the private channel over the corporate channel represents their strong self-interests and is associated with higher agency costs. We further show that the distinction between the two channels is less important when the CEOs’ private political spending patterns are aligned with those of their own firms. Our results are robust to techniques alleviating the potential endogeneity issue related to the political spending behavior.
Keywords: Political Spending, Campaign Contributions, Earnings Management, Self-interests, Agency Costs
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