GDP Growth Incentives and Earnings Management: Evidence from China

60 Pages Posted: 1 Sep 2019 Last revised: 13 Jul 2020

See all articles by Xia Chen

Xia Chen

Singapore Management University

Qiang Cheng

Singapore Management University

Ying Hao

Beijing Normal University (BNU)

Qiang Liu

Chongqing University, School of Economy and Business Administration

Date Written: May 6, 2020

Abstract

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

Chen, Xia and Cheng, Qiang and Hao, Ying and Liu, Qiang, GDP Growth Incentives and Earnings Management: Evidence from China (May 6, 2020). Singapore Management University School of Accountancy Research Paper No. 2020-109, Available at SSRN: https://ssrn.com/abstract=3439132 or http://dx.doi.org/10.2139/ssrn.3439132

Xia Chen

Singapore Management University ( email )

60 Stamford Rd.
Singapore 178900
Singapore

Qiang Cheng (Contact Author)

Singapore Management University ( email )

60 Stamford Road
Singapore, 178900
Singapore

Ying Hao

Beijing Normal University (BNU) ( email )

19 Xinjiekou Outer St
Haidian District
Beijing, Beijing 100875
China

Qiang Liu

Chongqing University, School of Economy and Business Administration

No.174 Shazhengjie
Shapingba
Chongqing, Chongqing
China

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