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Who Cooks the Books in China, and Does it Pay?

41 Pages Posted: 8 Feb 2014  

Toby Stuart

University of California, Berkeley - Haas School of Business; Harvard University - Entrepreneurial Management Unit

Yanbo Wang

National University of Singapore (NUS) - NUS Business School

Date Written: February 4, 2014

Abstract

We document the extent of fraudulent reporting among 467 private Chinese technology companies. Comparing the financial statements of companies that concurrently apply for government-funded innovation grants and that file financial statements with a second state agency, we demonstrate a systematic gap in reported profit figures in the two sets of books. We find: (i) over half the companies report materially different profit numbers to the two agencies; (ii) companies founded by individuals with political connections and those that have received investments from venture capital firms are much more likely to commit fraud, and (iii) it pays to cheat; net of ties to the government, we estimate that companies which “cook” their books have considerably higher odds of being awarded an innovation grant. Especially given the prevalence of fraud, we conclude that the prognostic factors for the propensity to commit fraud can be a source of performance differential for emerging market companies.

Keywords: Financial Fraud, Political Connection, Venture Capital, Emerging Market Economies

JEL Classification: H25, K33, K42, M48, P16

Suggested Citation

Stuart, Toby and Wang, Yanbo, Who Cooks the Books in China, and Does it Pay? (February 4, 2014). Available at SSRN: https://ssrn.com/abstract=2391744 or http://dx.doi.org/10.2139/ssrn.2391744

Toby E. Stuart

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Harvard University - Entrepreneurial Management Unit ( email )

Cambridge, MA 02163
United States

Yanbo Wang (Contact Author)

National University of Singapore (NUS) - NUS Business School ( email )

Mochtar Riady Building #6-40
15 Kent Ridge Drive
Singapore, 117592
Singapore

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