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.