Abstract
ABSTRACT This paper explores the impacts of local government debts (LGD) on earnings management strategy and moderation effects of internal control. Using a purpose-build database incorporating Chinese LGD and listed firms, we find that firms engage in income-increasing earnings management in response to local debt expansion. The results remain stable to endogeneity tests and various robustness checks. Furthermore, the impacts of LGD are markedly pronounced in non-SOEs, firms audited by Big 4 auditors, young and declining firms, and firms located in less-marketized regions. Moreover, this study reveals that internal control exerts moderation effects on the relation between LGD and earnings management.
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