Government Subsidies and Income Smoothing

54 Pages Posted: 31 Oct 2017 Last revised: 6 Feb 2024

See all articles by Kostas Pappas

Kostas Pappas

University of Liverpool - Accounting and Finance Division

Martin Walker

The University of Manchester - Manchester Business School

Alice Liang Xu

The University of Manchester - Manchester Business School

Cheng (Colin) Zeng

Hong Kong Polytechnic University

Date Written: February 2, 2024

Abstract

This study examines the relationship between government subsidies and income smoothing using a sample of US listed firms. We find that subsidized firms smooth their earnings more aggressively than their unsubsidized peers. This finding is consistent with the reasoning that subsidized firms bear higher political costs and have more incentives to smooth earnings to avoid public attention. In addition, smoothing by subsidized firms is more pronounced when the subsidies are granted through non-tax-related channels than through tax-based channels, and the positive association between government subsidies and income smoothing is stronger for firms under higher public scrutiny and with less transparent information environments. Further analysis shows that smoothing by subsidized firms serves mainly to obfuscate earnings and subsidized firms that smooth earnings tend to continue receiving subsidies in the future. Overall, our results help explain the role of government subsidies in shaping firms’ accounting and disclosure choices.

Keywords: Income smoothing; Subsidies; Political cost; Obfuscation

JEL Classification: H70, M41, M48, G38

Suggested Citation

Pappas, Kostas and Walker, Martin and Xu, Alice Liang and Zeng, Cheng, Government Subsidies and Income Smoothing (February 2, 2024). Available at SSRN: https://ssrn.com/abstract=3061933 or http://dx.doi.org/10.2139/ssrn.3061933

Kostas Pappas

University of Liverpool - Accounting and Finance Division ( email )

Liverpool
United Kingdom

Martin Walker

The University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Alice Liang Xu

The University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Cheng Zeng (Contact Author)

Hong Kong Polytechnic University ( email )

11 Yuk Choi Rd
Hung Hom
Hong Kong

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