Determinants and consequences of business entertainment expense disclosure.

  • Jia Xu

Student thesis: Doctoral Thesis


This study investigates the voluntary disclosure of business entertainment expense
(BEE) which is associated with building guanxi (relationship or connection) in Chinese business and is also a legitimate tax-deductible expense in China. The study is motivated by the unique Chinese reporting setting, the business relationship building culture, and the political cost of reporting entertainment expenses in a climate where excessive expenditure is potentially perceived as an indicator of underlying corruption.

The study investigates three sets of research questions: (1) the drivers of BEE
disclosure and spending; (2) the impact of 2012 anti-corruption campaign on BEE disclosure and spending; and (3) the BEE spending outcomes for firms in terms of performance and relationship benefits. Specifically, the study analyses the BEE disclosure behaviour of Chinese listed firms before and after the anti-corruption campaign in 2012, including the effect BEE has on firm performance and granting of government subsidies.

Data is hand collected from Chinese listed firms’ annual reports and notes to the
financial statements for the years 2008 to 2016. The BEE disclosing sample comprises almost 14,000 firm-years of data. In total 71.8% of firms disclose BEE across all industries with disclosure levels varying between 43.8% and 100% of the firms in an industry. The coverage of the data set makes this study the most comprehensive research into BEE disclosure and behaviour to date.

The evidence supports hypothesis one in that BEE is more likely to be disclosed by firms with higher sales growth and higher growth options but that are smaller and have lower expenses. BEE is also less likely to be disclosed by firms with foreign investors that employ a Big Four auditor.

The analysis supports hypothesis two in that the firms spending more on BEE
exhibited higher expenses, lower sales growth, and are more profitable. The higher spending firms tended to have lower analyst coverage and are less likely to be SOEs.

After controlling the drivers identified in the first two hypotheses the analysis shows that BEE disclosure increased after the anti-corruption campaign, but the level of BEE spending decreased. The decrease in spending is largely driven by the firms whose BEE spending is higher than their industry median, consistent with hypothesis three that political costs motivated the change in spending.

Finally, the analysis suggests that disclosed BEE is associated with increased future sales growth and firms that spent higher on BEE receive higher government subsidy. These results are consistent with hypothesis four and five.

This study comprehensively extends the prior literature on the disclosure and nature of BEE spending in China. It provides insights into both the legitimate and illegitimate aspects of BEE for future research to build upon. Finally, the study provides insights into the positive impacts that the tax-deductible BEE has on political connection and firm performance in China.
Date of Award13 Oct 2021
Original languageEnglish
SupervisorKeith Duncan (Supervisor) & Juncheng Hu (Supervisor)

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