Purpose: This study analyses the engagement of Greek municipalities in earnings management activities through the manipulation of their accrual accounts. It aims at identifying whether discretionary accruals are associated with certain financial sustainability measures calculated through financial statement numbers.
Design: To test the hypotheses, the annual financial data of Greek municipalities for the period 2011-2018 is used. The final sample corresponds to an unbalanced panel data sample that includes 1,565 yearly observations. Total accruals and discretionary accruals modelling is based both on the aggregate Jones model and the modified Jones model.
Findings: The findings provide evidence that Greek municipalities engage in earnings management practices through the manipulation of accruals. Moreover, there is corroborative evidence that financial sustainability indicators, such as indebtedness, liquidity and efficiency ratios are related to the magnitude of earnings management while earnings management behaviour during the year preceding the municipal elections is more intense.
Originality: The paper expands the literature in earnings management in local governements by analysing the relation of financial sustainability indicators to this behaviour.