Unintended Consequences of ‘The Plan for Growth’: Earnings Management in the United Kingdom

ABSTRACT Using public UK firm data for 2006–2015, I examine whether a government policy can unintentionally promote earnings management. The Plan for Growth 2011 aims to reduce the overall burden of regulation on businesses to help them grow faster. Motivated by such higher growth expectations , opportunistic executives can manage earnings to hit those growth targets. Consistent with this view, I find that firms increase abnormal accruals after the reforms, while the firm‐level growth expectations rise. Regarding the economic impact, these firms experience lower cashflows, higher equity cost, and tax avoidance. I also provide suggestive evidence for corporate fraud after the reform.