Economic policy uncertainty, financial reporting quality, and accounting enforcement: International evidence

Purpose: Given recent developments around the world, the purpose of this article is to explore the association between financial reporting quality and economic policy uncertainty. Additionally, we investigated whether accounting enforcement acts as a mediating factor between the two. Design: To achieve the purpose, we used a large sample consisting of 284 908 firm-year observations from 29 countries. We estimate the quality of financial reporting using traditional accruals models. For economic policy uncertainty, we rely on the index developed by Baker et al. (2016). Accounting enforcement was quantified using the strength of the auditing and reporting standards. Furthermore, for robustness tests, we use alternative measures for all these variables. We ran an OLS regression with country and industry fixed effects. Findings: We found that uncertainty is negatively associated with the quality of financial reporting. Accounting enforcement plays a key role in reducing this negative association. For the baseline model, for one unit of change in accounting enforcement, the negative association between financial reporting quality and economic policy uncertainty is reduced between 10.41% and 17.54%. For the alternative measures, the decrease is between 1.14% and 6.93%. Our results are consistent and robust. Practical Implications: This study is important for capital markets and policy makers, since the last 3 years were characterized by high uncertainty. Therefore, the present study provides evidence of the disruptive impact of uncertainty on financial reporting quality. Furthermore, we introduced in discussion the role of accounting enforcement and, therefore, propose a possible instrument available for policy makers to counter the effects of uncertainty. Originality: Compared to existing research, the present study expands the period of analysis until 2022; therefore, it covers the periods with the highest uncertainty. Combined with the large number of countries, the observations ensure the relevance of the findings. The present study is also one of the first that introduces in discussion the role of accounting enforcement, which is an important topic in accounting research