Earnings management in local government healthcare reporting: Financial distress vs. peer influence?

Abstract

This paper examines if financial distress and/or peer influence predict local governments' earnings management in the context of municipal healthcare expense reporting in Finland. Our statistical analyses use data hand-collected from all Finnish municipalities between 2016 and 2021. We document peer influence on earnings management by understating healthcare expenses in the public sector: Our results show that a municipality's decision to manage earnings upwards is positively associated with the healthcare district's central municipality's choice to understate its expenses. However, we do not find support for financial distress predicting earnings management. In our setting, peer influence appears to be a stronger motivation for financial reporting choice than municipality-specific characteristics.