Earnings Quality and Government Influence: A Review of Political Economy Theory

Authors

https://doi.org/10.22105/aaa.v2i3.72

Abstract

This study explores the impact of justice shares, a state-sponsored ownership transfer aimed at income redistribution, on the earnings quality of firms listed on the Tehran Stock Exchange (TSE) from 2013 to 2022. Drawing on a political economy perspective, it investigates how populist state ownership and political influence affect financial reporting in weak governance environments. Using a panel dataset of 1,150 firm-year observations, the analysis employs multivariate fixed-effects regression models to assess the relationship between justice share ownership and earnings quality. To ensure robustness, two alternative proxies, income smoothness and Earnings Predictability (EP), are used along with the primary earnings quality metric. The theoretical framework draws from recent studies on real versus accrual-based earnings management and the trade-offs firms make under political insulation. The results reveal a significant negative association between justice share ownership and earnings quality, suggesting that politically motivated ownership structures incentivize earnings management. These findings align with recent evidence from China and other emerging markets showing that government-controlled firms often prioritize social or political objectives over transparency. In contrast to studies from Vietnam and Indonesia that highlight governance-enhancing effects of certain ownership forms, our results underscore the destabilizing role of populist state interventions in financial reporting. This study contributes to the growing literature on political economy and accounting by empirically testing the consequences of state-led populism on corporate earnings quality. It introduces the concept of publicness as a lens to interpret how hybrid state-market control, exemplified by Iran’s Justice Shares program, can compromise financial accountability. In contrast to emerging-market studies suggesting that board diversity or  Institutional Ownership (INSOWN) can mitigate earnings manipulation, our study shows that politically embedded ownership models are resistant to such corrective mechanisms. It is one of the first studies to empirically investigate the intersection of earnings quality, state ownership, and political influence in the context of a Middle Eastern emerging economy.

Keywords:

Earnings quality, Political economy, State ownership, Populism, Justice shares, Government intervention

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2025-09-18

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Vol. 2 No. 3 (2025): Accounting and Auditing with Applications

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Imeni, M. ., & Tayebinaz, S. . (2025). Earnings Quality and Government Influence: A Review of Political Economy Theory. Accounting and Auditing With Applications , 2(3), 157-170. https://doi.org/10.22105/aaa.v2i3.72

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