GDP Growth Incentives and Earnings Management: Evidence from China
60 Pages Posted: 1 Sep 2019 Last revised: 13 Jul 2020
Date Written: May 6, 2020
Using data from China, we examine whether and how the incentive to boost GDP growth at the government level affects earnings management at the firm level. We find that firms in provinces with GDP growth lower than the national level or the average of the adjacent provinces are more likely to engage in earnings management than firms in other provinces. Specifically, we find that these firms are more likely to inflate their revenues, overproduce, and delay their asset impairment losses, which are the three main channels through which corporate accounting numbers can affect the calculation of GDP. The aggregate earnings management induced by GDP growth incentives accounts for about 0.5% of GDP. The results are stronger for local state-owned enterprises, over which provincial government officials have more influence, and in provinces with a lower level of marketization, where government intervention is more prevalent. The results are also stronger for firms in provinces with younger governors and in the years immediately prior to the turnover of provincial officials, when GDP growth plays an important role in determining whether the officials get promoted. Overall, this paper is the first to provide systematic evidence on how firms engage in earnings management to boost the GDP growth in their provinces.
Keywords: GDP growth, earnings management
JEL Classification: M40
Suggested Citation: Suggested Citation