Mayor re-election and earnings management: evidence from Portuguese municipalities

Abstract

PurposeThe aim of this paper is to investigate whether Mayors in Portugal engage in earnings management close to zero with the motivation of re-election.Design/methodology/approachThe data used in this study were annual financial information from Portuguese municipalities from 2005 to 2016, as well as data on elections and Mayor re-elections involving three political cycles. The methodologies employed were quantitative, including graphical and panel data regressions.FindingsThe results indicate that municipalities used discretionary accruals to engage in earnings management to report net earnings close to zero, and re-election seems to be a motivation for earnings management behaviour. Furthermore, the results suggest that municipalities in which the Mayor is re-elected are less likely to report positive net earnings close to zero.Originality/valueThis paper makes a valuable contribution to the literature on earnings management in municipalities. At the theoretical level, it makes it possible to identify whether re-election is a motivation for earnings management and, in this sense, to identify patterns of behaviour by managers. On a practical level, the knowledge of a manager's behaviour patterns will help to anticipate his or her future behaviour and, consequently, may prevent inefficiencies.

Guest editorial: From walking to running – What's the next step for earnings management research in public sector organizations?

“…This article offers a valid contribution to the earnings management literature as it is the first study investigating budget execution items. It is also noteworthy in that it provides evidence of the role of political factors, similar to the work of Ferreira (2024), along with additional variables linked to the financial sustainability of municipalities.…”

“…Previous research on this topic at the local government level is confined to a study by Cohen et al (2019), which showed that there is an inclination in Greek municipalities to engage in earnings management the year before the election year and that, when the mayor of a municipality is re-elected, earnings management is higher, ceteris paribus, in comparison with that in municipalities where the mayor is elected for the first time. The work by Ferreira (2024) is based on a sizable sample of Portuguese municipalities for the period 2005-2016, covering three election cycles. As her point of departure, Ferreira utilizes the Jones model (Jones, 1991) to estimate discretionary accruals and the distribution approach developed by Burgstahler and Dichev (1997) Financial Management management, with this behavior becoming more pronounced in pre-election years.…”

“…The study by Ferreira (2024) investigates whether mayors tend to manage earnings motivated by their re-election. As such, the article seeks to shed additional light on a largely unexplored – albeit important – topic in earnings management: the role of earnings management in election politics.…”