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

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  • Zhi Wang
  • Geert Braam
  • Daniel Reimsbach
  • Jiaxin Wang

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.

Suggested Citation

  • Zhi Wang & Geert Braam & Daniel Reimsbach & Jiaxin Wang, 2020. "Political embeddedness and firms’ choices of earnings management strategies in China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(5), pages 4723-4755, December.
  • Handle: RePEc:bla:acctfi:v:60:y:2020:i:5:p:4723-4755
    DOI: 10.1111/acfi.12690
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