The historical origins of earnings management: a geographical discontinuity design based on the Great Wall

Abstract

Purpose

Does the history of the bureaucratic system, along with the establishment of the Great Wall during the Ming and Qing dynasties (1368–1911), affect firm behavior across the borderlands of the Great Wall?

Design/methodology/approach

The Ming and Qing dynasties built a centralized administrative system in the borderlands on the south side of the Great Wall, in contrast to the “feudal lordship” system on the north side. Employing a regression discontinuity analysis framework with the Great Wall as a geographical discontinuity, we examine the long-run effects of the Great Wall on firms’ earnings management.

Findings

Using a large sample of nonlisted firms in the central core frontier region, we show that the earnings management of firms in the region south of the Great Wall is significantly curtailed compared with firms in the north of it, and this effect is more pronounced for non-SOEs. Our findings are robust to a battery of tests to account for alternative explanations.

Practical implications

Overall, by emphasizing the role of institutions, like legal system, shaped in history on firms’ earnings management, this study sheds new light on institutional determinants of firms’ behaviors in earnings information disclosure.

Originality/value

First, we enrich our understanding of the institutional determinants of firms’ financial reporting outcomes. Second, our findings shed new light on the long-term effects of historical ruling styles on modern corporate behavior.

Citation

Gao, M., Gu, Q., He, S. and Kong, D. (2024), "The historical origins of earnings management: a geographical discontinuity design based on the Great Wall", Journal of Accounting Literature, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/JAL-08-2023-0153