Economics at your fingertips  

Is the squeaky wheel getting the grease? Earnings management and government subsidies

Yujie Zhao, Donghua Zhou, Kangsheng Zhao and Ping Zhou

International Review of Economics & Finance, 2019, vol. 63, issue C, 297-312

Abstract: We study the impact of earnings management on government subsidies using a sample of China's utility firms. Our findings suggest that negative earnings management is associated with increased government subsidies, especially for policy subsidies with the goal of helping weak firms and high government discretion in target selection. The findings are robust to a battery of alternative variable definitions and estimation methods. We further observe that perk consumption, empire building, and promotion may be the three motivations for managers engaging in earnings management. Incentive compensation increases the cost of understating income while rent seeking and political connections can substitute for earnings management in obtaining subsidies; thus, the above results hold only for firms with no incentive compensation, low rent seeking, or no political connection. Effective external monitoring can reduce managers' misbehavior, so the positive effect is not significant for strong monitoring firms. Moreover, negative earnings management will reduce firm profitability and destroy firm value in the future, while improving social performance in hiring more employees and paying more taxes, which could impair firm profitability.

Keywords: Earnings management; Government subsidies; Motivations; Economic and social performance; China (search for similar items in EconPapers)
JEL-codes: G10 G30 M41 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link)
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

DOI: 10.1016/j.iref.2019.03.012

Access Statistics for this article

International Review of Economics & Finance is currently edited by H. Beladi and C. Chen

More articles in International Review of Economics & Finance from Elsevier
Bibliographic data for series maintained by Haili He ().

Page updated 2020-07-01
Handle: RePEc:eee:reveco:v:63:y:2019:i:c:p:297-312