We extend the literature on earnings management through real operating decisions by providing insight into the types of expenditures (core versus noncore and operating versus non-operating activities) affected by earnings management. We partition a sample of California nonprofit hospitals based on their earnings management incentives. We find that expenditures on non-operating and non-revenue-generating activities appear to decrease in hospitals with incentives to engage in such behavior, while core patient care activities remain unchanged. We also find evidence of earnings management in non-core operational expenses. Second, we analyze real earnings management related to pay-for-performance incentives and find that hospitals with stronger performance incentives exhibit a significant incremental decrease in expenditures. Finally, we examine two different kinds of behavior to discriminate between earnings management and good operational decisions and provide weak evidence to support opportunism rather than good management. Together, these results provide evidence of the use of real operating decisions to manage earnings.

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This research paper analyzes the impact of information technology (IT)in a healthcare setting using a longitudinal sample of hospital data from 1976 to 1994. We classify production inputs into labor and capital categories. Capital is classified into three components—medical IT capital, medical capital, and IT capital—and labor is classified into two components, medical labor and IT labor. Results provide evidence that IT contributes positively to the production of services in the healthcare industry.

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