Do Firms Manipulate Earnings after Winning Public-Private Partnership Bids? Evidence from China

Abstract

We examine whether firms manipulate their reported earnings after winning investment project bids. China’s adoption of the public-private partnership (PPP) provides a unique setting for our analysis. Using the PPP announcements to identify the firms participating in PPP projects, we find that firms conduct both accrual-based and real earnings management after PPP participation. Our findings survive difference-in-differences design with different matching methods. We document that PPP-participating firms have strong incentives to manipulate earnings because of abnormal administrative expenditure and greater short-term performance pressure than non-PPP-participating firms. The auditors respond by charging higher audit fees due to the increased risk. Moreover, government subsidies relieve performance pressure and decrease the likelihood of earnings management among PPP-participating firms. Overall, this study documents the unintended consequences of PPP participation.

Keywords: corporate investment; public-private partnership (PPP); earnings management; firm performance

JEL Classification: M41; G15; G31; H54