“Keep silent and make money”: Institutional patterns of earnings management in China

Assessing the overall quality of Chinese financial data is important to both academic researchers and regulators. Using data from the industrial census of China, we examine the institutional pattern of the manipulation of reported profit statistics by manufacturing firms. This manipulation of profits is called “earnings management.” We find that earnings management is more pervasive in China than in mature market economies such as the U.S., and that Chinese firms appear to follow a “keep silent, make money” strategy by managing their reported earnings to zero. Specifically, we find that increased earnings management is associated with state-owned firms, firms reporting to higher levels of government, and firms in more marketized regions.

► Using data from the industrial census of China, we examine the institutional pattern of earnings management by manufacturing firms. ► We find that earnings management is more pervasive in China than in mature market economies such as the U.S. ► Chinese firms appear to follow a “keep silent, make money” strategy by managing their reported earnings to zero. ► We find that increased earnings management is associated with state-owned firms, firms reporting to higher levels of government, and firms in more marketized regions.