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 use both accrual-based and real earnings management methods to improve their short-term performance after PPP participation. Our findings survive difference-in-differences design with propensity score matching. 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, earnings management lessens for firms with more government subsidies as they ease the performance pressure. 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