Political connections and earnings management: the role of governance in the case of Canadian largest listed companies

This study examines the relationship between firms' political connections, earnings management practices, and governance. We then have investigated Canadian non-financial S&P/TSX copanies, over a ten-year period (2009-2018), by using quantitative analyses methods. The results are very surprising and show that: 1) the studied firms practice significantly less real earnings management (REM) than discretionary accruals (DAC) earnings management; 2) being politically connected does not really push companies to practice more earnings; in fact, it is an opposite situation that has been observed when the DAC is used; 3) finally and most surprising, having a good-quality governance when the firms are politically connected push them to practice more earnings management (still when the DAC is used). Thus, the politically connected firms seem to practice less earnings management through DAC, but when they have higher-quality governance, they seem to care less about the quality of financial information and do more earnings management.