Can we trust the accounting discretion of firms with political money contributions? Evidence from U.S. IPOs

• Politically connected IPO issuers report income-increasing discretionary accruals. The greater the issuers’ dependence on politics, higher Investors fully incorporate accruals information into prices. At-issue systematically predict future reported performance. IPOs are less likely to fail. Using hand-collected data from U.S., we examine influence of political money contributions (PMC) financial reporting. Unraveling conflicting managerial incentives, develop and test three distinct hypotheses whereby accounting discretion is utilized downplay, embellish, or truthfully impart PMC firm’s prospects. Consistent with last two hypotheses, document effects strongest for firms sensitive policy outcomes, least affected by contemporaneous events. Post-issue analysis shows that at-issue performance but unrelated stock returns. Survival indicates a lower probability failure. Robust battery checks, our results support value-relevance novel use as means signaling expected gains.