Enterprises, workers' political orientation influences profit management and company balance sheet

The political views of employees influence the bottom line of company budgets and profit management. At least across the Atlantic. This is demonstrated by an innovative Italian inter-university research published in the Journal of Financial Reporting and Accounting by researchers Luca Menicacci of the Free University of Bolzano, Gianluca Moretti of the University of Florence and Associate Professor Simone Terzani of the University of Perugia. The research 'Red, blue and the bottom line: political ideologies in financial reporting' reveals the subtle but powerful link between ideological orientation and earnings management practices in US companies. To do so, it analysed over 700 companies listed in the US S&P 1500 stock index between 2013 and 2020. What was analysed, first of all, were the political contributions of the employees, which are traceable and public in the US. An original, bottom-up way to measure the 'political identity' of companies.

The study cross-referenced financial data with the political ideology prevailing in each company, distinguishing between 'liberal' (closer to the Democrats) and 'conservative' (closer to the Republicans). The authors then measured the propensity of companies to manipulate profits, i.e. to strategically alter them (legally but with discretion) for corporate or reputational purposes. Three different models of analysis were used to identify both the intensity and the direction of this accounting behaviour: one - composite - to measure its magnitude, one based on the 'degree of discretion in balance sheet valuations' (non-monetary income components) and one on production costs (i.e. real actions, such as cuts in R&D or marketing). Liberals more active (and bolder) in earnings management. The study finds that 'liberal' companies have a greater tendency to manipulate profits than 'conservative' companies and do so mainly 'downwards'. In practice, they are more likely to understate profits in the short term, for strategic reasons. Three possible explanations have been identified by the researchers: to create reserves ('cookie jars') to be used in a less rosy future; to concentrate losses in one period in order to distribute clean ('big bath'); to appear less profitable in order to access public subsidies. All strategies compatible with an ideological orientation that is more tolerant of risk, less afraid of temporary losses, and more open to the role of the state in the economy.

Original contribution to the accounting literature. The work stands out in the academic literature because it does not merely study the links between business and politics, but explores how ideas - disseminated in the internal culture of an organisation - are reflected in economic behaviour. An innovative approach that enriches the understanding of the dynamics between finance, corporate culture and society. 'With this study,' says Luca Menicacci, researcher in Business Economics at the Faculty of Economics at unibz, 'we are contributing to a more multi-faceted reading of financial statements: not only as a technical tool, but also as a product of the cultural and value choices that run through organisations'.