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

45 Pages Posted: 7 May 2020 Last revised: 27 Dec 2021

See all articles by Muhammad Ansar Majeed

Muhammad Ansar Majeed

Zhejiang Gongshang University

Chao Yan

Zhongnan University of Economics and Law - School of Accounting

Huijie Zhong

Zhongnan University of Economics and Law

Date Written: October 16, 2021

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

Suggested Citation

Majeed, Muhammad Ansar and Yan, Chao and Zhong, Huijie, Do Firms Manipulate Earnings after Winning Public-Private Partnership Bids? Evidence from China (October 16, 2021). Emerging Markets Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3560345 or http://dx.doi.org/10.2139/ssrn.3560345

Muhammad Ansar Majeed

Zhejiang Gongshang University ( email )

No: 18, Xuezheng Street
Xiasha University Town
Hangzhou, Zhejiang
China

Chao Yan (Contact Author)

Zhongnan University of Economics and Law - School of Accounting ( email )

182# Nanhu Avenue
East Lake High-tech Development Zone
Wuhan, Hubei 430073
China

Huijie Zhong

Zhongnan University of Economics and Law ( email )

182# Nanhu Avenue
Wuhan, 430073
China

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