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Erschienen in: Review of Accounting Studies 3/2020

27.07.2020

GDP growth incentives and earnings management: evidence from China

verfasst von: Xia Chen, Qiang Cheng, Ying Hao, Qiang Liu

Erschienen in: Review of Accounting Studies | Ausgabe 3/2020

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Abstract

Using data from China, we examine whether and how the incentive to boost GDP growth at the government level affects earnings management at the firm level. We find that firms in provinces with GDP growth lower than the national level or the average of the adjacent provinces are more likely to engage in earnings management than firms in other provinces. Specifically, they are more likely to inflate revenues, overproduce, and delay asset impairment losses. The aggregate earnings management induced by GDP growth incentives accounts for about 0.5% of GDP. The results are stronger for local state-owned enterprises, in provinces with a lower level of marketization, for firms in provinces with younger governors, and in the years immediately prior to the turnover of provincial officials. Overall, this paper provides systematic evidence on how firms engage in earnings management to boost the GDP growth in their provinces.

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Fußnoten
1
GDP manipulation is not limited to developing countries and nondemocracies. It also occurs in other countries, although on a much smaller scale. See Holtz (2014) for examples of political interference in statistics in the United States. Also see https://​dailyreckoning.​com/​manipulating-the-masses/​, accessed on October 3, 2018.
 
2
In 2010, WikiLeaks released a conversation that occurred in 2007 between Li Keqiang, the then-governor of Liaoning province, and the U.S. Ambassador to China. Li was quoted as saying that the GDP figure reported by his province was “unreliable” and “man-made” (World Finance, February 16, 2018, https://​www.​worldfinance.​com/​markets/​gdp-whats-in-a-number, accessed on October 3, 2018).
 
3
The highest subnational division in China is the province. Mainland China has 22 provinces, four provincial-level municipalities (i.e., Beijing, Shanghai, Tianjin, and Chongqing), and five autonomous regions. In this paper, we refer to all of these divisions as provinces for ease of presentation.
 
4
The discrepancy can be due to the different scope of analyses used by the NBS and the provincial bureaus of statistics, double counting across provinces, and GDP manipulation at the provincial level.
 
7
In 2017, the NBS established a platform to publicize cases of enterprises reporting inaccurate statistical numbers. See http://​www.​stats.​gov.​cn/​tjfw/​bgt2018/​201809/​t20180918_​1623468.​html. Accessed on October 3, 2018.
 
8
See Dechow and Skinner (2000) and Dechow et al. (2010) for reviews of the literature.
 
9
See Bonsall et al. (2013); Konchitchki and Patatoukas (2014); Li et al. (2014); Ball and Sadka (2015); and Shivakumar and Urcan (2017).
 
12
GDP calculation is nuanced. Our discussions here focus on the principles and basic formulas.
 
13
In an untabulated analysis, we examine the contemporaneous relation between these three accounts and GDP growth. Specifically, we regress a province’s GDP growth rate on the contemporaneous growth rate of aggregate sales, aggregate inventory, and aggregate asset impairment losses of all the listed firms in the province as well as the province’s lagged GDP growth rate. We find that GDP growth rate is positively correlated with the growth rate of aggregate sales and aggregate inventory and is negatively correlated with the growth rate of aggregate asset impairment losses (t = 10.14, 6.19, −2.88, respectively), confirming the importance of these measures in the calculation of GDP.
 
14
At the same time, one firm’s intermediate inputs are another firm’s value-added, which also increases GDP.
 
15
Under the income approach of GDP calculation, compensation to employees, production taxes, and fixed asset depreciation are added back to operating income. We make the same adjustment in Fig. 1. Separately, we would like to note that asset impairment losses are a small component of GDP, increasing from 0% of GDP in 2002 to 0.4% in 2016. Readers should therefore interpret the results on asset impairment losses with caution.
 
16
During the sample period, listed firms become an increasingly large part of the economy in China. In terms of sales, we find that listed firms account for 15.5% of total sales of all firms (listed and private firms) in China in 2002 and this percentage increases to 26.9% by 2016.
 
17
In a similar vein, Piotroski and Zhang (2014) find that, when provincial officials are evaluated based on market development, they pressure firms to go public prematurely. The idea also resembles how executive compensation induces earnings management (e.g., Bartov and Mohanram 2004; Cheng and Warfield 2005).
 
18
Research has shown that firm opportunism is more prevalent in regions with weak legal institutions and poor market development in China (e.g., Jian and Wong 2010).
 
19
Consistent with this notion, research finds that government spending, investments, and IPO listings intensify before the turnover of officials at both the central and provincial levels in China (e.g., Piotroski and Zhang 2014).
 
20
This implies that most of the provinces report GDP growth higher than the national level, which is based on the figures from the NBS. This is another sign of GDP manipulation at the provincial level.
 
21
While China differs from the United States in the underlying economic infrastructures (e.g., Allen et al. 2009; Carpenter and Whitelaw 2017), we believe that the estimation models for the earnings management proxies developed using the U.S. data apply to Chinese firms. We are not aware of any systematic issues with applying the earnings management proxies developed in the United States to Chinese firms. Studies of Chinese firms have also adopted the commonly used earnings management proxies developed in the United States (e.g., Zhang et al. 2010; Chen et al. 2011a; Liu et al. 2016). The possibility that these models capture earnings management in Chinese firms with noise would bias against finding results consistent with our hypotheses.
 
22
We calculate the earnings management proxies based on the consolidated figures of the listed firms. According to our conversations with several statistics bureau officials, firms report the consolidated figures to the statistics bureaus without adjusting for the amounts from their out-of-province subsidiaries. Our inferences remain the same when we adjust the financial numbers by removing the amounts from the out-of-province subsidiaries.
 
23
Listed firms in China have to satisfy certain profitability requirements before they can issue additional shares. Research finds that listed firms manage earnings to meet these profitability requirements (e.g., Chen and Yuan 2004; Haw et al. 2005). As such, we include an indicator variable for whether firms meet the SEO profitability requirement (ROE_SEO_L). We do not use contemporaneous profitability measures to avoid their spurious effects on earnings management proxies.
 
24
Using a slightly different range, such as [0, 0.1] or [0, 0.3], leads to the same inferences. Note that, while GDP_Incentive is measured in year t-1, GDP_MJB is measured contemporaneously with the earnings management proxies in year t.
 
25
Untabulated F-tests indicate that the coefficient on GDP_Incentive is significantly larger than that on GDP_MJB, except for Abnormal_PROD. As such, we use GDP_Incentive as our main GDP growth incentive measure throughout the paper.
 
26
We also replicate the cross-sectional tests using GDP_MJB to capture GDP growth incentives (untabulated). We find that the positive effect of GDP_MJB on the extent of earnings management is stronger for local SOE firms than for the other firms and stronger in the years before the regular turnover of provincial officials than in the other years.
 
27
In an untabulated test, we find that the inferences hold for both the first half and the second half of the sample period. However, we find that the results are weaker for the analysis of DR in the most recent years, 2013–2016. Chinese President Xi Jinping started his first term in 2013 and launched a number of initiatives, including environmental protection and campaign against official corruption. These initiatives likely reduce the focus on GDP growth in the evaluation of provincial officials.
 
28
Turnover can also occur in other years for various reasons. For example, some governors are promoted in the middle of their term, some resign before the term ends because they have reached retirement age, and others are demoted or prosecuted for corruption.
 
29
Interestingly, the coefficient on Turnover is significantly negative for Abnormal_PROD and Overall_EM. This result suggests that, when there are no GDP growth incentives, firms in the provinces with upcoming provincial official turnover manage earnings downward, consistent with the reversal nature of earnings management.
 
30
We find similar evidence at the provincial level. The aggregate earnings management induced by GDP growth incentives is positively associated with one-year-ahead aggregate inventory write-offs and asset impairment losses.
 
31
We regard the Big Four auditors as non-local auditors. Alternatively, classifying them as local or nonlocal based on their headquarters in China (Beijing for E&Y and KPMG and Shanghai for PwC and Deloitte) leads to quantitatively similar results.
 
32
Government subsidies (scaled by total assets) have a mean of 0.08% and a standard deviation of 0.58%. Note that government subsidies do not affect the GDP calculation.
 
33
New loans (scaled by total assets) have a mean of 1.31% and a standard deviation of 6.59%. Separately, we do not find a significant impact of induced earnings management on interest rate, suggesting that the additional loans are not obtained at the expense of higher interest rate.
 
34
The governor promotion variable is set as 2 for governors who are promoted to a higher position (e.g., a province’s party secretary), 1 for those staying in the current position or moving to a similar position, and 0 for demotion.
 
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Metadaten
Titel
GDP growth incentives and earnings management: evidence from China
verfasst von
Xia Chen
Qiang Cheng
Ying Hao
Qiang Liu
Publikationsdatum
27.07.2020
Verlag
Springer US
Erschienen in
Review of Accounting Studies / Ausgabe 3/2020
Print ISSN: 1380-6653
Elektronische ISSN: 1573-7136
DOI
https://doi.org/10.1007/s11142-020-09547-8

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