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Having the government as a client: Does this reduce earnings management of the firm?

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  • Glegg, Charmaine
  • Harris, Oneil
  • Ngo, Thanh
  • Susnjara, Jurica

Abstract

Does government contracting translate to better earnings quality and less earnings management? In this study, we seek to answer this question. We find strong evidence that government suppliers strategically substitute accrual-based earnings management with real earnings management. Firms with government customers distinctively employ greater real activities manipulation than their industry peers, as proxied by abnormal discretionary expenditures, abnormal production costs, and total real activities manipulation while avoiding accrual manipulation. These findings are robust to a host of robustness checks including measurement errors, selection bias and endogeneity. Hence, our findings have implications for procurement policy as policymakers may underestimate the total earnings management activities of government suppliers.

Suggested Citation

  • Glegg, Charmaine & Harris, Oneil & Ngo, Thanh & Susnjara, Jurica, 2021. "Having the government as a client: Does this reduce earnings management of the firm?," Journal of Government and Economics, Elsevier, vol. 4(C).
    • Handle: RePEc:eee:jogoec:v:4:y:2021:i:c:s2667319321000227
    DOI: 10.1016/j.jge.2021.100022
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    More about this item

    Keywords

    Government contractors; Real activities management; Accruals management;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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