Accounting Information as Political Currency
Corporate donations to political campaigns reveal a lot about mutual back-scratching in the political and business arenas. Now new research from Harvard Business School suggests that corporate giving may consist of more than monetary contributions. The evidence shows that firms involved in potentially controversial business activities—outsourcing, for example—understate their earnings if it might boost a candidate’s chances of election.
A new study by HBS professor Karthik Ramanna and a colleague from MIT, Professor Sugata Roychowdhury, suggests that accounting information itself may function as an important political contribution.
The authors studied “573 Democratic and Republican candidates in the 2004 congressional races,” and found that of “338 corporate donors that gave at least $10,000 to closely watched races—those races with greater uncertainty and higher visibility, involving 95 candidates of the total—were more likely to understate their earnings in the two quarters prior to the election.”
This so-called “‘downward earnings management,’ as it is known in accounting, seems to have been motivated by the desire of contributing firms to not taint preferred candidates with association to the political red flag of 2004—outsourcing—as well as to ensure future benefits and avoid future costs in regulatory matters. ”
Firms manage accounting numbers to avoid regulatory scrutiny. The implication is that firms manage accounting numbers to influence political decisions.
Importantly, the authors conclude, “While corporate donors in general do not exhibit evidence of downward earnings management, corporate donors to candidates in closely watched races exhibit significant evidence of downward earnings management in the second and third calendar quarters of 2004.”
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