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Opportunistic Financial Reporting and Credit Market Participation in Municipalities

Fri, April 15, 3:55 to 5:35pm, Grand Hyatt Atlanta, TBA

Abstract

In this study, I examine opportunistic financial reporting (OFR) in the governmental sector. The concept of OFR is similar to earnings management in the corporate sector, but acknowledges several key differences in the governmental sector– most importantly, (a) most governmental revenues are not “earned” in the traditional sense, and (b) governments follow a unique reporting model, which utilizes both full accrual and modified accrual accounting, resulting in two separate sets of financial statements. Using a unique dataset of hand-collected financial data from Californian municipalities, I find that governments are use both discretionary accruals (in the full accrual financial statements) and general fund transfers (in the modified accrual financial statements) report income opportunistically. I also find that credit market participation significantly influences these activities. Overall, the evidence suggests that municipalities use discretionary accruals more aggressively prior to bond issues. Additionally, municipalities with high levels of bonded debt use discretionary accruals and general fund transfers less opportunistically.

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