Earnings Management and Financial Sustainability in Greek Municipalities

Abstract

This study investigates whether Greek municipalities engage in earnings management practices through the manipulation of accruals and if this behaviour is related to indications of financial sustainability. In order to test our hypotheses, we use the annual financial data of Greek municipalities for the period 2011-2015. The final sample corresponds to an unbalanced panel data sample that includes 1,119 yearly observations. Total accruals and discretionary accruals modelling is based on the aggregate Jones (1991) model. Our findings provide evidence that Greek municipalities undertake earnings management practices through the manipulation of accruals in order to report financial results around the value of zero. Moreover, we find corroborative evidence that financial sustainability indicators relate to the magnitude of earnings management.