Opportunistic financial reporting around municipal bond issues
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Understanding how government officials exercise discretion over financial reporting is essential for citizens, regulators, and researchers to interpret and monitor financial performance. I examine two measures of discretion in governmental financial statements: abnormal accruals in full accrual financial statements, and other financing sources and uses in modified accrual financial statements. Using a unique dataset of hand-collected financial data from California, I document empirically that municipal governments pursue a break-even income in both sets of financial statements, and that they focus particularly on avoiding deficits. Further, I find evidence that municipalities employ discretionary accruals but not other financing sources and uses to a greater extent before issuing bonds. Prior to bond issuance, officials facing deficits use less discretion. The results highlight the multidimensional and sometimes conflicting incentives government officials face, and the reporting strategies they use as they weigh the expected costs and benefits of using accounting gimmicks to report favorable bottom lines.
KeywordsGovernmental accounting Municipal bonds Discretionary accruals Earnings management
JEL codesM41 H70 H74 G51
This paper is based on my dissertation completed at the University of Alabama. I gratefully acknowledge my dissertation chair, Linda Parsons, for her valuable insights and encouragement, as well as the other members of my dissertation committee—Bruce Barrett, David Cicero, Walt Robbins, and Mary Stone—and the rest of the University of Alabama faculty and fellow PhD students. I thank Patricia Dechow (editor), Jim Naughton (discussant), and the Review of Accounting Studies 2017 conference participants for their comments. I also thank workshop participants from Rutgers University, the University of Illinois-Chicago, the 2016 AAA Annual Meeting, the 2016 AAA Government and Nonprofit section midyear meeting, and the 2016 AAA Southeast Region Meeting. I also received helpful comments and advice from Bill Baber, Reining Petacchi, and the rest of the Georgetown faculty, as well as from Sharon Kioko, Collin Gilstrap, and Jordan Rippy. I thank the University of Alabama, Georgetown University, and the Government and Nonprofit section of the AAA for financial support.
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