Xiao Chen
Tsinghua University
Chi-Wen Jevons Lee
Tulane University
Jing Li
Hong Kong University of Science and Technology
Abstract: In a Socialist market economy like China, the relations between various layers of government and state-owned enterprises are tangled. When the Socialist system embraces the market economy, it creates many facets of conflict of interest and goal incongruence. This paper describes the collusion between local government and state-owned enterprises in conducting earnings management to circumvent central government regulation, a phenomenon known as Chinese Tango. Our study shows that the local government has actively participated in earnings management of the listed firms located in her jurisdictions by providing them with tax break, refunds, and fiscal subsidies. The primary purpose of these favorable taxation treatments is to assist the firms to manage accounting earnings so as to meet the regulation stipulated by the central government.
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