The impact of the Chinese stimulus program on earnings management

Purpose - The purpose of this paper is to investigate the impacts of the 2008 Chinese stimulus program on earnings management. Design/methodology/approach - Using a sample period from 2004 to 2011 (per-stimulus period: 2004-2007 and post-stimulus period: 2008-2011), the authors compare the change in earnings management between the firms that received the stimulus funds and those that did not receive the stimulus funds. Findings - The authors find that from the pre- to post-stimulus period, the recipient firms experienced a greater increase in downward accrual management and a greater decrease in real management than the non-recipient firms did. This result is primarily driven by the non-state-owned enterprises and firms using non-Big-Four auditors. Originality/value - The results suggest that the earnings management level is ultimately determined by the underlying economic and political factors influencing managers’ and auditors’ incentives (Cohen,2008; Ballet al.,2003). Meanwhile, some mechanisms, such as high-quality audit (Eshleman and Guo,2014) and state ownership (Wang and Yung,2011) can also play a role in determining the level of earnings management.