Against an ongoing intense search for ideal forms of public value creation, state-owned enterprises (SOE) have always played a certain role: Today they represent about 10% of global domestic product worldwide (Burton et al. 2015). Under the notion of “re-municipalization” (e.g. Hall et al. 2013), these enterprises currently re-gain consideration. Public management scholars investigating the improvement of public service delivery focus on privatization and rather neglect corporatization, i.e. a change in legal form to separate service delivery from government while preserving state ownership (Lindlbauer et al. 2015). The idea of such enterprises is to reduce immediate state influence through increased managerial autonomy (Lioukas et al. 1993).
Managers tend to behave in their self-interest and their (political) principal’s interest and therefore impose political costs to their organizations (Jensen/Meckling 1976; Watts/Zimmerman 1986). Supporting this aspect, which is in accordance with agency theory and public choice theory, researchers have found earnings management to be linked to political incentive settings within public administrations (e.g. Ferreira et al. 2013; Kido et al. 2012; Stalebrink et al. 2007). Earnings management occurs when managers use judgment in financial reporting and in structuring transactions to opportunistically alter financial reports (Ronen/Yaari 2007). To the best of our knowledge, researchers again neglected corporatized SOEs.
Corporate disclosure regulation in Germany requires all private corporations to disclose financial information. Disclosure encourages and disciplines politically motivated management behavior (Miller/Skinner 2015). Accordingly, ‘corporatizing public service’ and ‘disclosing public service financial information’ need to be considered simultaneously. So far, research on the benefits of financial disclosure focusses on the link to cost of capital, and is therefore limited to a capital market context (Lambert et al. 2007; Ernstberger et al. 2012; Christensen et al. 2013). In consequence, an investigation of SOEs – due to their position in between private governance mechanisms and state ownership – is not only relevant from a public management perspective but can also contribute to positive accounting theory in general.
Regarding the financial disclosure of SOEs and its determinants, we study whether two ownership-related incentive settings, namely political cycle and/or the municipality’s financial situation, are determinants of German municipality-owned enterprises’ (MOE) earnings management. Additionally, we consider if and how corporate governance mechanisms affect the influences of the said determinants. To assess the focal relationships empirically, we apply Jones (1991)-type accrual models to analyse earnings management with adaptations for the public sector context (e.g. demografics). This model provides normal and abnormal levels of accruals as proxy for earnings management. We use archival/panel data of ~140 MOEs (period 2007-2014) included in the BvD AMADEUS database. SOEs are particularly relevant to public service provision (Hurlebaus 2012), e.g. in the utilities sector, which is one central element of municipalities’ tasks (Bogumil/Holtkamp 2013). We thus focus on the municipal level. We also collected data from the “Regionalstatistik” from the German state and federal statistical offices (municipalities’ financial situation) and the ‘Kommunales Wahllexikon’ (political cycle). Preliminary results reveal hardly any relationship to the political cycle, but show a correlation between municipal financial situation and earnings management.
Accounting and accountability of value creation in innovative public service delivery arra
Laschewski_Thaler_IRSPM_2018.pdf 