Earnings Management through Real Activities Manipulation: Evidence from Nonprofit Hospitals
Speaker
Abstract
| Managers have opportunities to manage earnings through real operating decisions. We contribute to the earnings management literature in several ways. First, we extend the analysis to nonprofit organizations and provide insight into the types of expenditures (core versus noncore and operating versus non-operating activities) that change when earnings management occurs. We partition the sample of California nonprofit hospitals based on their incentives to increase or decrease earnings and then analyze changes in expenditures and asset sales. We find that expenditures on non-operating, non-revenue-generating activities appear to decrease in nonprofit hospitals with incentives to engage in such behavior. Core activities (daily services for inpatients) are extremely important to hospitals, so we do not expect or find real earnings management in these areas. We do, however, find evidence of earnings management in non-core operational expenses. Second, we examine three different kinds of behavior to discriminate between earnings management and good operational decisions. We analyze the influence of pay-for-performance incentives and find that nonprofit hospitals with stronger performance incentives exhibit an incremental and significant decrease in expenses. We also find reversals in the suspect expenditures in the next period. Finally, we find that nonprofit hospitals with incentives to decrease expenditures have lower income in subsequent periods. Together, these results provide evidence of the use of real operating decisions to manage earnings. |
| Contact information: |
| Paolo Perego |
