How Does Government Accounting Supervision Affect Earnings Management?

Abstract

 This paper explores the effectiveness of supervision in curbing local firms' earnings management and its underlying mechanism. It was found that the impact is particularly pronounced in provinces with severe GDP exacerbation, provincial governors facing impending promotion, firms controlled by the government, and firms with weak external monitoring. The findings of this study highlight the importance of addressing the agency problem between the central and local governments in authoritarian regimes in the context of curbing firms’ earnings manipulation to improve capital market efficiency. We recommend the implementation of a more comprehensive strategy to improve the reliability of firms' financial reporting quality with the aim of improving the efficiency of capital markets in the long run. On the other hand, since external monitoring plays a significant role in preventing local firms from engaging in earnings management, we recommend that new policies be introduced to encourage more institutional investment in listed firms.