Does Competition Encourage Unethical Behavior? The Case of Corporate Profit Hiding in China
Posted: 28 Feb 2005
Date Written: February 2005
This paper examines whether competition pressures enhance firms' incentives to hide profits. By developing a novel empirical procedure to trace out the extent of profit hiding at firm level and applying it to a database that covers more than 20,000 large-and-medium-sized industrial firms in China for the 1995-2002 period, we find that competition is indeed positively correlated with firms' incentives to hide profits. We also find that firms at relatively disadvantageous positions demonstrate stronger propensities to hide profits. Our analysis suggests that policies used to promote competition should be accompanied by policies aiming at leveling playing fields and strengthening institutional infrastructure.
Keywords: competition, firm behavior, tax evasion, Chinese economy
JEL Classification: G30, H26, L10, D21
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