Chinese Tango: Government Assisted Earnings Management

37 Pages Posted: 23 Jun 2003  

Xiao Chen

Tsinghua University - School of Economics & Management

Chi-Wen Jevons Lee

Tulane University - A.B. Freeman School of Business; Tsinghua University - School of Economics & Management

Jing Li

The University of Hong Kong - School of Business

Date Written: May 2003

Abstract

In a Socialist market economy like China, the relations between various layers of government and state-owned enterprises are tangled. When the Socialist system embraces the market economy, it creates many facets of interest conflict and goal incongruence. This paper describes the collusion between local government and state-owned enterprises in conducting earnings management to circumvent central government regulation, a phenomenon known as Chinese Tango. Our study shows that the local government has actively participated in earnings management of the listed firms located in her jurisdictions by providing them fiscal transfers. The primary purpose of this government-assisted earnings management is to assist the firms to manage accounting earnings so as to meet the regulation stipulated by the central government.

Keywords: local taxation, fiscal transfers, rights offering, earnings management, returns on equity (ROE)

JEL Classification: M41, M43, G38, H25

Suggested Citation

Chen, Xiao and Lee, Chi-Wen Jevons and Li, Jing, Chinese Tango: Government Assisted Earnings Management (May 2003). Available at SSRN: https://ssrn.com/abstract=408800 or http://dx.doi.org/10.2139/ssrn.408800

Xiao Chen

Tsinghua University - School of Economics & Management ( email )

Hiadian District
Beijing 100084
China
+8610-6278-9863 (Phone)
+8610-6278-5876 (Fax)

Chi-Wen Jevons Lee (Contact Author)

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States
504-862-8485 (Phone)

Tsinghua University - School of Economics & Management ( email )

Beijing 100084
China
86-10-6277-2942 (Phone)

Jing Li

The University of Hong Kong - School of Business ( email )

Meng Wah Complex
Pokfulam Road
Hong Kong
China

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