Do City Governments Manage their Financial Data Prior to Issuing Bonds

Abstract

Governmental Accounting Standings Board (GASB) Statement No. 34 requires financial reporting for state and local governments.  The motivation behind GASB 34 was to make governmental financial reports more comprehensive and transparent.  Until its implementation, data on state and local governments was not reported consistently from entity to entity.  This paper extends the earnings management literature to include municipalities and funds management.  In particular, earnings cannot be reported in governmental units.  Instead, Changes in Fund Balance is used. Thus, a unique contribution is the use of earnings management models to test Fund Balance management.  We use a version of the Jones model (Meisel, 2007).  Specifically, we test whether city governments manage their financial data for events such as debt or bond issues to achieve certain benchmarks. We find that cities are motivated to manage their financial information lower in the year just before the bond issue.