Does Competition Encourage Unethical Behavior? The Case of Corporate Profit Hiding in China

Posted: 28 Feb 2005

See all articles by Hongbin Cai

Hongbin Cai

Peking University - Guanghua School of Management

Qiao Liu

The University of Hong Kong - School of Economics and Finance; Peking University - Guanghua School of Management

Geng Xiao

The University of Hong Kong - School of Economics and Finance

Date Written: February 2005

Abstract

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

Suggested Citation

Cai, Hongbin and Liu, Qiao and Xiao, Geng, Does Competition Encourage Unethical Behavior? The Case of Corporate Profit Hiding in China (February 2005). Available at SSRN: https://ssrn.com/abstract=676183

Hongbin Cai

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Qiao Liu (Contact Author)

The University of Hong Kong - School of Economics and Finance ( email )

School of Economics and Finance
Pokfulam
Hong Kong
Hong Kong
852-2859-1059 (Phone)
852-2548-1152 (Fax)

Peking University - Guanghua School of Management ( email )

Peking University
Beijing, Beijing 100871
China

Geng Xiao

The University of Hong Kong - School of Economics and Finance ( email )

8th Floor Kennedy Town Centre
23 Belcher's Street
Kennedy Town
Hong Kong

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