The Price of Ambition: Top-down Amplification of Economic Growth Targets and Corporate Misconduct

Abstract

This study examines the impact of the top-down amplification of economic growth targets on corporate misconduct. We present compelling evidence that firms in regions with higher target amplification are more likely to engage in misconduct. By examining the underlying mechanisms, we identify relaxed external monitoring and intensified financial constraints as two key channels through which amplified growth targets facilitate corporate misconduct. In the cross-section, the effect of target amplification is more pronounced when local officials have strong promotion incentives, for firms in regions with lower levels of local trustworthiness, firms operating in more competitive industries, firms with higher corruption-related expenditures, and for non-state-owned enterprises. Finally, firms that engage in misconduct in response to amplified economic growth targets are less productive. Overall, our findings reveal the dark side of amplified economic growth targets through the lens of corporate misbehavior, and offers insights that may help refine political promotion evaluation criteria to promote ethical business practices in emerging markets.