The Influence of Ownership and Regulatory Scrutiny on Earnings Management in U. S. Hospitals

Abstract

We examine accrual and real earnings manipulations in U.S. hospitals, where we expect differences in hospital ownership (nonprofit vs. for-profit) will result in varying incentives to manage earnings. First, we document that nonprofit hospitals have lower levels of income-increasing and income-decreasing earnings manipulations than for-profit hospitals. Second, when we partition nonprofit hospitals by states with community benefits laws, we find that this greater regulatory scrutiny is associated with lower income-decreasing and income-increasing earnings management. Further, under regulatory scrutiny, nonprofit hospitals provide a greater proportion of uncompensated (charity) care with respect to net revenue. By examining differences in regulatory scrutiny types (i.e. reporting only vs. provision only), we find that either requirement is associated with less severe earnings management. Overall, our findings suggest that reporting incentives associated with ownership and those influenced by increased regulatory scrutiny help to improve earnings quality.

Keywords: earnings management, regulatory scrutiny, nonprofit organizations, hospitals

JEL Classification: I18, M48, M49