Federal judge ideology and real earnings management

Hatem RJIBA, K. Elmawazini, E. Galariotis, A. Hossain

We examine the impact of liberal judge ideology, as an exogenous proxy for litigation risk, on real earning management. Our main findings suggest that U.S. firms headquartered in circuits that are more likely to be dominated by liberal judges engage in less real earnings management. Our findings are robust to considerations of alternate measures of our main variables and after the exclusion of litigious industries and circuits that are traditionally more liberal. We also show that the negative association between liberal court and REM is more pronounced for firms with more financial constraints, firms with a higher level of institutional shareholding, when CEOs have higher incentives to engage in opportunistic real activity management, and when CEOs have higher managerial ability.

Publication type: 
Scientific Article
Date de parution: 
International Review of Financial Analysis