Who Cooks the Books in China, and Does it Pay?

We document the extent of fraudulent reporting among 467 private Chinese technology companies. Comparing the financial statements of companies that concurrently apply for government-funded innovation grants and that file financial statements with a second state agency, we demonstrate a systematic gap in reported profit figures in the two sets of books. We find: (i) over half the companies report materially different profit numbers to the two agencies; (ii) companies founded by individuals with political connections and those that have received investments from venture capital firms are much more likely to commit fraud, and (iii) it pays to cheat; net of ties to the government, we estimate that companies which “cook” their books have considerably higher odds of being awarded an innovation grant. Especially given the prevalence of fraud, we conclude that the prognostic factors for the propensity to commit fraud can be a source of performance differential for emerging market companies.