Contemporary Accounting Research Vol. 41 No. 3 2024

Government subsidies and income smoothing

Kostas Pappas¹; Martin Walker²; Alice Liang Xu²; Cheng Zeng³

¹ University of Liverpool Management School University of Liverpool Liverpool UK · ² Alliance Manchester Business School University of Manchester Manchester UK · ³ School of Accounting and Finance Hong Kong Polytechnic University Kowloon Hong Kong

Abstract

This study examines the relationship between government subsidies and income smoothing using a sample of US‐listed firms. We find that subsidized firms smooth their earnings more aggressively than their unsubsidized peers. This finding is consistent with the reasoning that subsidized firms bear higher political costs and have more incentives to smooth earnings to avoid public attention. In addition, smoothing by subsidized firms is more pronounced when the subsidies are granted through non‐tax‐related channels than through tax‐based channels, and the positive association between government subsidies and income smoothing is stronger for firms under higher public scrutiny and with less transparent information environments. Further analysis shows that smoothing by subsidized firms serves mainly to obfuscate earnings and that subsidized firms that smooth earnings tend to continue receiving subsidies in the future. Overall, our results help explain the role of government subsidies in shaping firms' accounting and disclosure choices.

DOI

10.1111/1911-3846.12947

Volume

41

Issue

3

Pages

1477-1512

Language

en

Sources

bibtex:phds-export.bib openalex crossref

Cite

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