Abstract
We use satellite night lights data to estimate the extent of provincial-level gross domestic product (GDP) manipulation in China and show that firms located in provinces with greater GDP manipulation have higher cost of equity. This effect is significant for local state-owned enterprises (SOEs) only; furthermore, it is more pronounced when local government officials face greater promotion pressure and when institutional ownership is lower. We also document a negative association between future earnings and GDP manipulation. Overall, our findings suggest that Chinese local governments intervene in local SOEs’ decisions to manipulate GDP figures which may cost shareholders.
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