Government involvements and earnings management

Abstract

This study investigates the effects of government involvements in shaping the relationship between investment opportunity and earnings management in politically inactive frms. Based on a unique setting in China, where the geographic distance between firms and local governments is set exogenously, we find that government involvements significantly decrease politically inactive firms’ reported earnings for firms with high investment opportunity. Overall, we fill the literature gap by providing supporting evidence about firms with better investment opportunity can use earnings disclosure strategy access to more external financing.