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Government assisted earnings management in China
Authors:Xiao Chen  Chi-Wen Jevons Lee  Jing Li
Institution:1. School of Economics and Management, Tsinghua University, China;2. A.B. Freeman School of Business, Tulane University, New Orleans, LA 70118-5669, USA;3. Graduate Institute of Business, Zhejiang University, China;4. Graduate School of Business, Columbia University, USA
Abstract:As the socialist system in China embraces the market economy, it has created many conflicts of interests and collusion between firms and different layers of governments. The central government in China sets regulations to ensure the quality of firms listed in the capital market, while local governments engage in inter-jurisdictional competition for more capital, and their interests are aligned with listed firms through the stringent IPO quota system. This paper examines how local governments in China help listed firms in earnings management to circumvent the central government’s regulation. We find that local governments provide subsidies to help firms boost their earnings above the regulatory threshold of rights offering and delisting. Moreover, this collusion between government and listed firms in earnings management exists mainly in firms controlled by local governments.
Keywords:C71  G32  G38  H71  M41
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