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Fiscal rules and creative accounting: Evidence from Japanese municipalities

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  • Hirota, Haruaki
  • Yunoue, Hideo

Abstract

This paper analyzes a new fiscal rule and creative accounting using stock-flow adjustments. Previous studies investigate creative accounting using country- or state-level data, although the definitions of creative accounting differ depending on the study. We contribute to the literature on creative accounting by using Japanese municipality data from FY2007 to FY2010, following von Hagen and Wolff (2006). We focus on stock-flow adjustments by considering the relationship between the increase in the change in debt stock and the decrease in the deficit to measure creative accounting. Our contribution is the finding that municipalities engage in stock-flow adjustments by increasing their expenditures and revenues through intergovernmental transfers, which represents creative accounting because it allows municipalities to delay improving their fiscal conditions. To evaluate a new fiscal rule, we should check not only the targeted indexes but also the untargeted indexes, which municipalities do not have an incentive to control.

Suggested Citation

  • Hirota, Haruaki & Yunoue, Hideo, 2022. "Fiscal rules and creative accounting: Evidence from Japanese municipalities," Journal of the Japanese and International Economies, Elsevier, vol. 63(C).
    • Handle: RePEc:eee:jjieco:v:63:y:2022:i:c:s0889158321000514
    DOI: 10.1016/j.jjie.2021.101172
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    Cited by:

    1. Bessho, Shun-ichiro & Hirota, Haruaki, 2023. "Do public account financial statements matter? Evidence from Japanese municipalities," European Journal of Political Economy, Elsevier, vol. 78(C).
    2. Goto, Tsuyoshi & Yamamoto, Genki, 2023. "Debt issuance incentives and creative accounting: Evidence from municipal mergers in Japan," Journal of the Japanese and International Economies, Elsevier, vol. 68(C).
    3. Heinemann, Friedrich & Nover, Justus, 2023. "State-owned enterprises, fiscal transparency, and the circumvention of fiscal rules: The case of Germany," ZEW Discussion Papers 23-058, ZEW - Leibniz Centre for European Economic Research.
    4. Maria Kovacova & Lenka Hrosova & Pavol Durana & Jakub Horak, 2022. "Earnings management model for Visegrad Group as an immanent part of creative accounting," Oeconomia Copernicana, Institute of Economic Research, vol. 13(4), pages 1143-1176, December.
    5. Niklas Potrafke, 2023. "The Economic Consequences of Fiscal Rules," CESifo Working Paper Series 10765, CESifo.
    6. Roman Blazek & Pavol Durana & Jakub Michulek, 2023. "Renaissance of Creative Accounting Due to the Pandemic: New Patterns Explored by Correspondence Analysis," Stats, MDPI, vol. 6(1), pages 1-20, March.

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    More about this item

    Keywords

    Fiscal rule; Creative accounting; Stock-flow adjustments; Soft budget constraint; Difference-in-differences;
    All these keywords.

    JEL classification:

    • H72 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Budget and Expenditures
    • H73 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Interjurisdictional Differentials and Their Effects
    • H74 - Public Economics - - State and Local Government; Intergovernmental Relations - - - State and Local Borrowing
    • H77 - Public Economics - - State and Local Government; Intergovernmental Relations - - - Intergovernmental Relations; Federalism

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