Big Brother or Good Steward? Earnings Management and the Disclosure of Personal Data Protection Systems

Using a sample of Chinese listed firms from 2009 to 2024, we examine whether voluntary disclosure of personal data protection systems (PDPS) is associated with earnings management. We document a moral licensing effect; that is, firms with higher PDPS disclosure engage in more real earnings management (REM). Specifically, a one‐standard‐deviation increase in PDPS disclosure is associated with a 21.5% increase in REM relative to its absolute mean, while accrual‐based earnings management (AEM) remains statistically unaffected. Decomposing REM reveals that abnormal production costs account for the overall increase, whereas discretionary expenses and abnormal operating cash flows exhibit offsetting patterns. Mechanism analyses suggest that the moral licensing conferred by PDPS disclosure facilitates opportunistic operational decisions through heightened operational risk under compliance pressure and weakened external monitoring reflected in lower audit quality. Cross‐sectional tests further indicate that this licensing effect is attenuated in firms embedded in stronger Confucian cultures, without political connections, and with more stable executive leadership. Overall, this study extends research on the determinants of earnings management from the perspective of data governance. We also enrich understanding of the economic consequences of voluntary PDPS disclosure. Our findings caution that disclosure of data protection practices may generate unintended governance consequences by enabling value‐destroying operational manipulation. The lesson is clear: in a world shaped by data and moral perception, voluntary disclosure is not always the cure; it can just as easily become the cover.