[This study investigates whether firms that expect increases in earnings resulting from sudden product price increases use accounting accruals to reduce earnings and, thus, political sensitivity. Specifically, oil firms' accruals are analyzed in a period of rapid gasoline price increases during the 1990 Persian Gulf crisis. Our results show that oil firms that expected to profit from the crisis used accruals to reduce their reported quarterly earnings during the Gulf crisis. In contrast to previous research, we find that the tendency to release good earnings news early, documented in prior research, is reversed for oil firms during the Gulf crisis. This finding suggests that the benefit of disclosing "good news" (i.e., earnings increases) early may have been out-weighed by the political costs associated with timely releases of the information.]

Abstract This study investigates whether firms that expect increases in earnings resulting from sudden product price increases use accounting accruals to reduce earnings and, thus, political sensitivity. Specifically, oil firms' accruals are analyzed in a period of rapid gasoline price increases during the 1990 Persian Gulf crisis. Our results show that oil firms that expected to profit from the crisis used accruals to reduce their reported quarterly earnings during the Gulf crisis. In contrast to previous research, we find that the tendency to release good earnings news early, documented in prior research, is reversed for oil firms during the Gulf crisis. This finding suggests that the benefit of disclosing "good news" (i.e., earnings increases) early may have been outweighed by the political costs associated with timely releases of the information.

Using a series of advanced tests from White's (2000) “Reality Check” to correct for data-snooping bias, we assess the out-of-sample performance of various portfolio strategies relative to the naive 1/N rule. When we analyze 16 basic portfolio strategies, 126 learning strategies, and nearly 2,000 extended strategies, we find that some strategies outperform the 1/N rule in conventional tests that do not account for data-snooping bias. However, after we use the new tests that control for such bias, we find that none or very few of these strategies outperform the 1/N rule. Thus, our finding underscores the necessity to control for data-snooping bias when making asset allocation decisions.