|Title: Does Competition Encourage Unethical Behavior? the Case of Corporate Profit Hiding in China|
|Reference Number: 1126|
|Publication Date: May 2005|
|JEL Classifcation: L10, D21, H26, G30|
| Author(s): |
This paper investigates whether market competition enhances firms' incentives to hide profits. We develop a theoretical model of firms' profit hiding behavior in competitive environments and derive several testable hypotheses. We then test the model using a database that covers more than 20,000 large-and-medium-sized industrial firms in China during the period 1995-2002. Our findings show that firms in more competitive market environments — as well as firms in relatively disadvantageous positions — hide a larger share of their profits. This suggests that policies intended to promote competition should be accompanied by policies aiming at strengthening institutional infrastructure and at leveling playing fields.
Key words: Competition, firm behavior, tax evasion, Chinese economy