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The dark side of rent-seeking: The impact of rent-seeking on earnings management

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  • Liu, Baohua
  • Lin, Yan
  • Chan, Kam C.
  • Fung, Hung-Gay

Abstract

We use Chinese firm-level data from 2009 to 2014 to examine the impact of rent-seeking on a firm's earnings management, an important indicator of quality in accounting information. We show that rent-seeking strongly promotes more earnings management, hiding firm-specific information from the market. When the Chinese government initiates an anti-corruption campaign that depresses rent-seeking activities, the significant relation between rent-seeking and earnings management disappears, confirming the predictive link of rent-seeking and earnings management. Our study clearly identifies rent-seeking as a key driver of earnings management. The positive effect of rent-seeking on earnings management is stronger at firms that are not state owned (non-SOEs) than at state-owned enterprises and at non-SOEs without political connections than at those with political connections.

Suggested Citation

  • Liu, Baohua & Lin, Yan & Chan, Kam C. & Fung, Hung-Gay, 2018. "The dark side of rent-seeking: The impact of rent-seeking on earnings management," Journal of Business Research, Elsevier, vol. 91(C), pages 94-107.
    • Handle: RePEc:eee:jbrese:v:91:y:2018:i:c:p:94-107
    DOI: 10.1016/j.jbusres.2018.05.037
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    More about this item

    Keywords

    Firm-level rent-seeking; Earnings management; SOEs; Politically connected firms;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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