Determining the drivers of earnings management among municipal enterprises: Evidence from Germany

IMPACT

Financial statements should provide useful information for stakeholders to assess the profitability and financial stability of both private and public enterprises. However, using the discretionary scope within accounting rules in a strategic sense is common among managers of private corporations and stakeholders are well aware of that. The article analyses indicators of earnings management in the financial statements of municipally-owned enterprises in Germany between 1998 and 2014. With regard to the results, stakeholders of public enterprises might take a more critical perspective on the financial statements of municipal enterprises, especially when these are highly indebted and ownership is dispersed.

ABSTRACT

Although earnings management is one of the most extensively covered topics in empirical accounting research, there are few studies of publicly-owned enterprises in Europe to date. This article aims closes this gap by using annual financial statement data from 11,721 German municipal enterprises from 1998–2014 to investigate various structural determinants of earnings management. Firm size and leverage were found to be positively related to earnings management. Concerning corporate governance, public enterprises with a more fragmented ownership structure were found to be more likely to manipulate their financial statements, while such practices are less prevalent in enterprises operating under German commercial law. Finally, the inclusion of private investors did not seem to have a significant effect on earnings management.

KEYWORDS:

• Earnings management
• empirical financial statement analysis
• institutional economics
• micro-level analysis
• municipal public enterprises
• principal–agent theory