We examine whether international equity mutual fund managers shift their portfolios toward stocks with higher financial reporting quality (FRQ) during periods of high political uncertainty. Our study is motivated by two primary factors. First, prior research shows evidence of fund managers’ “flight to quality” (e.g., to less risky securities) during periods of uncertainty. Second, recent theoretical research concludes that stocks with higher FRQ are assessed as less sensitive to systematic risk (such as political uncertainty). We employ national elections as exogenous increases in systematic risk in the local markets and accordingly use an international sample of mutual funds that focus on local markets. We find that mutual fund managers shift their equity holdings to stocks with higher FRQ during election periods when political uncertainty is higher. Such a flight‐to‐quality effect is less pronounced for elections with larger expected electoral margins in the pre‐election period (i.e., when the incumbent is more likely to win the election) and for countries with higher transactions costs. In contrast, the effect is more pronounced when governments have greater involvement in the local economy. Our inferences are robust to alternative proxies for political uncertainty and FRQ and to numerous other sensitivity analyses.

This paper investigates the effect of internal information asymmetry (IIA) within conglomerate firms on the quality of management forecasts and financial statements. We develop a novel measure to capture IIA between divisional managers and top corporate managers, computed as the difference in their respective trading profits on their own company's stock (DIFRET). Numerous validation tests indicate that DIFRET indeed captures the information asymmetry between divisional managers and top managers. In our primary tests, we find that DIFRET is associated negatively with the accuracy, bias, specificity, and frequency of management forecasts. Furthermore, the likelihood of error-driven accounting restatements increases with DIFRET. Our results, thus, suggest that external communication quality suffers when the information asymmetry between divisional managers and top managers is more severe.