The influence of institutional pressure on target setting

Abstract

We examine whether the desire to maintain sociopolitical legitimacy with critical stakeholders affects sales targets set by Chinese firms. Drawing from institutional theory, we argue that enterprises owned by local government (local-SOEs) feel greater pressure to maintain their legitimacy with the local government relative to private firms (non-SOEs), leading to a stronger association between the provincial GDP target (a legitimate benchmark) and firm-level targets. Results from manually collected data support this conjecture and are robust to alternate measures and samples. Increases in the demand for legitimacy -- measured using exogenous shocks and sample characteristics -- strengthen the association. Finally, changes in the coverage in the official press and changes in target achievement rates document the real effects of this strategy. Our findings demonstrate the effects of institutional pressures on corporate decisions and enrich our understanding on the socially constructed as well as instrumental rationality role of management accounting.