How government accounting supervision affects corporate financialization? Evidence from random inspections by China's ministry of finance

Abstract

Government regulatory interventions in the external business environment profoundly shapes firms’ economic behavior and operating strategic choices. Our study examines the causal relationship between government accounting supervision and corporate financialization by exploiting the quasi-experimental setting of random accounting information quality inspections implemented by China's Ministry of Finance. Using a difference-in-differences approach on a comprehensive dataset spanning from 2006 to 2022, we provide robust evidence that government accounting supervision significantly accelerates firms' transformation toward financialization. The mechanism analysis reveals that government accounting supervision exerts its influence through weakening market position and tightening financing constraints. We find that the effect is more pronounced among firms with myopia managers, greater performance pressure, higher perceptions of external uncertainty, and with stronger political background. In further analyses, we also provide evidence that government accounting supervision reduces corporate reputation and trade credit financing. By uncovering a previously underexplored regulatory driver of corporate financialization, our study enriches the literature on external governance and corporate resource allocation. The findings offer important policy implications for designing regulatory frameworks that enhance financial reporting quality while minimizing unintended distortions in firms' capital deployment within the real economy.

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