ECONOMIC POLICY UNCERTAINTY AND EARNINGS MANAGEMENT: DOES INSTITUTIONAL GOVERNANCE MATTER

This study examines how economic policy uncertainty (EPU) affects earnings management (EM), and how institutional governance moderates this relationship, using data from 27,598 firms across 22 countries from 2014 to 2021. We find that higher EPU increases accrual-based earnings management (AEM) and reduces real earnings management (REM), suggesting a shift to less observable EM methods. Strong institutional governance moderates the EPU–AEM relationship but has limited effect on REM. The moderating effect becomes more evident when accounting for complementary effects between AEM and REM, lagged EM, and past EPU. The impact varies by market classification, with AEM tends to respond in a greater extent to EPU in developed markets and REM more so in emerging markets. The findings imply that firms strategically adjust EM practices in response to EPU, with institutional governance playing a critical role in constraining such behavior. These insights highlight the importance of strengthening governance mechanisms, particularly in emerging markets, to enhance financial reporting quality under uncertainty. JEL Classification: G38, M48, M41.