Political embeddedness and firms’ choices of earnings management strategies in China

Abstract

We examine whether and how political embeddedness influences financial reporting quality in China by investigating how government ownership and political connections affect Chinese listed firms’ choices of earnings management strategies. The results show that state‐owned enterprises (SOEs), and in particular, central SOEs, are more likely to substitute accrual‐based earnings management strategies with costlier but less detectable real earnings management strategies than non‐SOEs. The results also indicate that politically connected enterprises (PCEs) are more likely to employ less detectable real earnings management strategies than non‐PCEs, so much so that PCEs’ total earnings management level is higher than that of non‐PCEs.

Earnings management in public-sector organizations: a structured literature review

“…As for articles focused on local governments, it seems that less recent studies (Stalebrink, 2007;Pinnuck and Potter, 2009) aimed to assess the magnitude of EM behavior, while more recent articles mainly studied the determinants of EM, especially focusing on the role of political factors and political competition (e.g. Kido et al, 2012;Ferreira et al, 2013Ferreira et al, , 2020Cohen et al, 2019;Donatella, 2020 Ding et al, 2007;Chen et al, 2011;Capalbo et al, 2014;Liu et al, 2014;Huang and Li, 2016;Wang et al, 2020). It is also worth noting that the vast majority of these articles focused on the Chinese context, and that some additional political factors are at play here that are not found in EM research outside the Asian context (e.g.…”

“…This allows scholars to analyze whether state-owned enterprises react differently to certain incentives compared to non-state-owned enterprises (e.g. Ding et al , 2007; Chen et al , 2011; Capalbo et al , 2014; Liu et al , 2014; Huang and Li, 2016; Wang et al , 2020). It is also worth noting that the vast majority of these articles focused on the Chinese context, and that some additional political factors are at play here that are not found in EM research outside the Asian context (e.g.…”

Political embeddedness and firms' growth

“…Existing literature has studied the "supporting hand" and the "grabbing hand" approaches (Frye & Shleifer, 1997;Shleifer, 1998;Chen et al, 2017). The former argues that the government provides its affiliated firms with more useful resources such as bank loans (Megginson et al, 1994;Brandt & Li, 2003;Wei & Varela, 2003;Lashitew, 2014), policy benefits (Innes, 1991;Wang et al, 2008), and political bailouts (Yu, 2013;Wang et al, 2020). In contrast, the "grabbing hand" perspective contends that political ties between the government and business are means for the government to extract rents from firms (Qian, 1994;Shleifer & Vishny, 1994;Cheung et al, 2010;Wang, 2015).…”

“…Thus, to avoid the bias caused by measuring firm's ownership according to the largest direct ownership (Xu & Wang, 1999;Sun et al, 2002;Tian & Estrin, 2008), consistent with Liu et al (2003), Xia & Fang (2005), Wang et al (2008), we contend that it is more accurate to determine a firm's ownership with the perspective of de facto ownership. We define that a firm is government-owned if the government directly and indirectlythrough pyramidal structuresholds the most of the company's shares (Xia & Fang, 2005;Wang et al, 2018Wang et al, , 2020. Subsequently, we create a dummy Government ownership that refers to government ownership, taking the value one if the government has de facto ownership of a firm, and zero otherwise.…”

Political embeddedness and multi-layered interaction effects on the performance of private enterprises: lessons from China

“…They concluded that the value of the business–state relations varies over time, depending on the trajectory of both economic and political institutions. Whilst referring to the reported performance it should be noted that politically connected enterprises are more likely to use less detectable real earnings management strategies than enterprises with no political embeddedness, so that the latter show lower total earnings (Wang et al , 2020).…”