Do political connections reduce earnings management?

This study examines whether political connections are associated with earnings management (both accrual-based and real) and whether the association is influenced by corporate governance and external auditing qualities. Empirical evidence on the association between political connections and earnings management remains unclear and offers mixed results. Using a sample of Indonesian firms, we find that political connections are negatively related to accrual-based (AEM) and real (REM) earnings management. In addition, the negative relationship between political connections and earnings management is more pronounced in better-governed firms and those audited by one of the Big 4 auditors. The results are robust to alternative measures of earnings management, endogeneity, and subsample tests. Our results extend the literature by shedding additional light on the governance role and benefits of political connections