Unintended Consequences of Economic Interventionism on Accounting Conservatism: A Natural Experiment

Posted: 14 Nov 2018

See all articles by Edward Lee

Edward Lee

University of Manchester - Alliance Manchester Business School

Kemin Wang

Fudan University - School of Management

Qiong Wang

Fudan University, School of Management, Fudan University, School of Management, Students

Xin Zhang

Fudan University - School of Management

Date Written: October 11, 2018

Abstract

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

Suggested Citation

Lee, Edward and Wang, Kemin and Wang, Qiong and Zhang, Xin, Unintended Consequences of Economic Interventionism on Accounting Conservatism: A Natural Experiment (October 11, 2018). Available at SSRN: https://ssrn.com/abstract=3264746

Edward Lee

University of Manchester - Alliance Manchester Business School ( email )

Booth St. West (Crawford House)
Manchester, M15 6PB
United Kingdom

Kemin Wang

Fudan University - School of Management ( email )

No. 670, Guoshun Road
Shanghai, 200433
China

Qiong Wang

Fudan University, School of Management, Fudan University, School of Management, Students ( email )

No. 670, Guoshun Road
Shanghai
China

Xin Zhang (Contact Author)

Fudan University - School of Management ( email )

No. 670, Guoshun Road
No.670 Guoshun Road
Shanghai, 200433
China

Register to save articles to
your library

Register

Paper statistics

Abstract Views
621
PlumX Metrics