We examine whether governments manipulate fiscal revenues to meet or exceed official revenue targets and, more importantly, how such manipulation affects firms within their jurisdictions, focusing on the Chinese setting. Analyzing the distribution of fiscal revenue forecast errors, we document strong evidence of manipulation at the provincial, prefectural, and county levels, with these practices more prevalent among lower-level governments. Focusing on the prefectural level, we find that, when local governments are suspected of manipulation, firms pay higher taxes, are more likely to pay environmental fines, and exhibit lower valuations. These adverse effects are concentrated among nonstate-owned enterprises and in prefectures where political leaders face stronger promotion incentives, and they are more pronounced under hard targets than under soft ones. Consistent with reduced firm valuations, we find affected firms curtail future investment. Overall, our findings suggest that target-driven fiscal manipulation by local governments imposes significant costs on firms within their jurisdictions.
| Speaker: | Dr Ningzhong Li Professor of Accounting, The University of Texas at Dallas |
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