Politically motivated accounting choice and financial indicators of political risk: The pharmaceutical industry.

摘要

The political cost hypothesis posits that firms facing a political exposure will use income reducing accounting alternatives to make regulators look more favorably upon them or to make their reported income less useful as a justification to voters for transferring wealth from them (Watts and Zimmerman (1978 and 1986). An important corollary to the political cost hypothesis is that large firms are more likely than small firms to use income decreasing accounting alternatives.;This study finds evidence consistent with pharmaceutical firms utilizing income lowering special items in response to increased political risk. This behavior is shown to be significantly different from that of a set of control firms. Weaker evidence is also found for income lowering discretionary accruals.;In contrast to studies of oil and gas firms, the evidence in this study is inconsistent with large pharmaceutical firms being more likely than small pharmaceutical firms to engage in politically motivated income reducing behavior. Also, no evidence is found of a correlation between politically motivated income reducing accounting alternatives and pharmaceutical gross margins, changes in gross margins, ROA or changes in ROA. Some evidence is found that high tax rate pharmaceutical firms were the most likely to engage in politically motivated income reducing accounting choice, although the results discussed in the next paragraph call this interpretation into question.;Evidence is found of above average increases in the Sales, Gross Margins and ROA's of established pharmaceutical firms concomitant with an increase in the pharmaceutical industry's political exposure. This is consistent with above average increases in the Sales, Gross Margins and ROA's of established firms being indicators of political risk. On the other hand, there is no evidence of above average increases in the tax rates of established pharmaceutical firms concomitant with an increase in the pharmaceutical industry's political exposure.;In a final investigation, there is no evidence of pharmaceutical firms switching to more income reducing depreciation or inventory valuation methods as a result of having faced a hostile political environment.