Ability or incentive? Defensive depreciation-estimate adjustment under China’s accelerated depreciation policy

Accelerated depreciation policies are widely used to stimulate investment, but little is known about whether beneficiary firms make offsetting adjustments in their financial reporting. China’s book-tax separation regime gives firms legal scope to adjust the accounting treatment of fixed-asset depreciation independently of the tax treatment. Exploiting the three waves of China’s accelerated depreciation policy (2014–2019) as a quasi-natural experiment, we use a staggered difference-in-differences design on 41,879 firm-year observations (2011–2024) to examine defensive depreciation-estimate adjustment. After implementation, treated firms significantly reduce their book depreciation rates, an effect peaking in the second year and concentrated among firms with the capacity to absorb the tax benefit, whereas firms with little capacity to absorb it show little evidence of a response. The evidence is more consistent with firms’ ability to adjust than with reporting-pressure incentives, extending understanding of the unintended accounting consequences of capital-based tax incentives. The findings suggest that regulatory review of disclosures on changes in depreciation estimates should focus on firms with meaningful capacity to benefit from the policy, rather than relying primarily on poor performance as an earnings-management risk signal.