Red, blue and the bottom line: political ideologies in financial reporting

Purpose: Unveiling the ideological undercurrents of corporate financial reporting, this study aims to explore how liberal and conservative political ideologies shape earnings management (EM) through a bottom-up approach, examining employee political donations in US firms. Design/methodology/approach: Leveraging a comprehensive sample of S&P 1500 firms from 2013 to 2020, multiple metrics are applied – including an aggregate index, accrual-based and production cost models – to analyse the relationship between political ideology and financial reporting. Findings: Results show how liberal firms demonstrate a distinctive EM approach, engaging more actively in downward earnings manipulation. This strategy suggests a willingness to absorb short-term losses, potentially creating strategic “cookie jars” or executing calculated “big bath” accounting manoeuvres. Research limitations/implications: The study’s focus on large, publicly traded US firms acknowledges contextual limitations in broader applicability. Practical implications: The research provides relevant insights for policymakers, investors and stakeholders, shedding light on the intricate interplay between political ideology and financial reporting practices. Social implications: Contributing to the broader discourse on corporate-policy interactions, the study highlights the complex reciprocal influences between firm political ideology and societal dynamics. Originality/value: By tracing the ideological footprints in EM, the study expands the understanding of how political factors subtly yet significantly shape corporate financial behaviours.