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

38 Pages Posted: 7 May 2020 Last revised: 27 Aug 2020

See all articles by Muhammad Ansar Majeed

Muhammad Ansar Majeed

Zhejiang Gongshang University

Chao Yan

Zhongnan University of Economics and Law

Huijie Zhong

Zhongnan University of Economics and Law

Date Written: August 13, 2020

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

Suggested Citation

Majeed, Muhammad Ansar and Yan, Chao and Zhong, Huijie, Do Firms Manipulate Earnings after Winning Public-Private Partnership Bids? Evidence from China (August 13, 2020). 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 ( 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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