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):

Hongbin Cai
University of California Los Angeles

Qiao Liu
The University of Hong Kong

Geng Xiao
The University of Hong Kong

Abstract:

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.

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Key words: Competition, firm behavior, tax evasion, Chinese economy

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Last modified: 05/11/2005