Unintended Consequences of Economic Interventionism on Accounting Conservatism: A Natural Experiment
Posted: 14 Nov 2018
Date Written: October 11, 2018
We examine the impact of government industrial policies on firms’ timely loss recognition. The underlying tension of our study stems from the two competing political economic effects that government interventions could induce in corporate financial reporting incentives. The benevolent (self-serving) government explanation predicts that firms will decrease (increase) accounting conservatism in response to such interventions. We observe that the benevolent government effect dominates through an identification strategy that exploits the exogenous variations and staggered coverages of industries over time under a natural experiment setting based on China’s unique Five-Year Plan program from 1991 to 2015. These findings are robust to alternative specifications of accounting conservatism and policy timing, and further analyses reveal the channels and consequences of the effect. Our evidence that industrial policies invoke negative unintended consequences on the corporate information environment offers new insights into the interventionist vs free market ideology debate, especially considering the ongoing rise of economic protectionism worldwide.
Keywords: industrial policies; political economy; accounting conservatism; financial reporting incentives; China’s Five-Year Plan
JEL Classification: M41; M48; O25
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