We investigate whether and why government procurement influences contracted firms’ financial reporting using data of domestically listed Chinese (A-share) firms, offering new insights into how state influence reshapes firm management in emerging markets. Based on a difference-in-differences strategy, we find that government procurement significantly reduces earnings management by curbing upward financial adjustments. This is robust to various checks, including narrowing the control group to losing bidders. We explain the effect by strengthened internal governance and reduced need for attracting attention from the general public. We further show suggestive evidence that government procurement winners build political connections, especially for non-state-owned enterprises, and further argue that the winning A-share firms shift their focus from appeasing the public to nourishing connections with the government because government funding effectively substitutes for private financing channels. The paper documents heterogeneous effects, which are particularly evident in cross-regional procurement, smaller enterprises, and regions with smaller fiscal pressure.
Liu et al. (Tue,) studied this question.