Managers can then choose the accounting policy to manage earnings without violating GAAP. This strategy is to inflate or deflate earnings than actually occurred, thus, it is called earnings management. The political cost hypothesis from Watts and Zimmerman (1978) predicts that if managers face the possibility of politically-imposed wealth transfers (e.g., taxes, government subsidies, tariffs, etc.) they will choose accounting procedures that reduce the expected value of the transfer (Cahan, 1992).