Internet of things adoption, earnings management, and resource allocation efficiency

ABSTRACT This study aims at addressing the economic consequences of the adoption of the Internet of Things (IoT) in China. As the fundamental technology for the next-generation information technology, IoT is supposed to have the most profound and comprehensive influence on both business operation and accounting information environment. By using a difference-in-differences method, our findings focusing on earnings management activities in China-listed firms around the adoption of IoT confirm the conjecture that such technology effectively deters accrual-based and real earnings management. The results are also robust to dynamic analysis, instrumental variable approach, PSM analysis, placebo tests and other robustness tests. Furthermore, we also document that the reduction in real earnings management due to IoT adoption has positive implications on the capital market, financing and investment activities and long-term operational efficiency. Taken together, we reveal the promising prospects of IoT adoption on corporate accounting information and establish the association between information technology and efficiency of resource allocation.