The Impact of Policy Uncertainty on Accounting Quality

Summary

This study delves into how economic policy uncertainty (EPU) affects accounting quality. Accounting quality is measured based on a model that compares the accruals component introduced to capture true economic performance to the portion representing performance measurement errors. The researchers suggest that during periods of heightened policy uncertainty, investors increase their attention to company-specific information, as the value of such information increases, and uninformed investors cannot easily infer information from the equilibrium price when uncertainty is high. Consequently, this greater scrutiny of company- specific information during high-EPU periods limits earnings management opportunities and motivates managers to improve accounting quality.