Local government debt and earnings management: evidence from China
Abstract
Purpose
This study examines the effect of local government debt (LGD) on corporate earnings management using 25,624 firm-year observations from 2007 to 2019.
Design/methodology/approach
Pooled ordinary least squares (OLS) regression is used to examine the impact of LGD on earnings management. A difference-in-differences (DID) method is also used to alleviate potential endogeneity.
Findings
Results show that LGD motivates firms to increase earnings management, especially income-decreasing earnings management. Findings are robust to DID method and robustness tests. Heterogeneity analyses show that the positive effect of LGD on earnings management is pronounced in firms with political dependence and moderated by external governance mechanisms. Further discussions indicate that tax enforcement is an underlying channel for LGD to affect earnings management. Firms engage in downward real earnings management by increasing their abnormal discretionary expenditures and higher LGD leads to a greater book-tax difference in those firms that manipulate income-decreasing earnings management.
Originality/value
This study contributes towards examining the political costs hypothesis, the microeconomic effects of LGD and the determinants of earnings management.
Keywords
Acknowledgements
The authors would like to thank the editorial team and the anonymous reviewers for their helpful comment.
Since acceptance of this article, the following author(s) have updated their affiliation(s): Hongji Xie is at the School of Economics, Guangxi University, Nanning, China.
Citation
Xie, H., Xu, S. and Tong, Z. (2023), "Local government debt and earnings management: evidence from China", International Journal of Emerging Markets, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJOEM-05-2022-0758
Publisher
:Emerald Publishing Limited
Copyright © 2023, Emerald Publishing Limited