Does competition encourage unethical behavior? The case of corporate profit hiding in China

  • Cai H
  • Liu Q
  • Xiao G
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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.

Author-supplied keywords

  • chinese economy
  • competition
  • firm behavior
  • tax evasion

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  • Hongbin Cai

  • Qiao Liu

  • Geng Xiao

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