Strategic Reporting by Nonprofit Hospitals: An Examination of Bad Debt and Charity Care
55 Pages Posted: 11 Sep 2020
Date Written: July 31, 2020
Given the tax advantages afforded to nonprofit hospitals, including the ability to issue tax-exempt debt, hospital managers encounter institutional pressure to provide community benefits. When nonprofits issue debt, they also face economic pressure to meet creditors’ financial performance expectations. We document a reporting strategy that allows nonprofit hospitals to reduce the cost of bond debt while simultaneously alleviating regulators’ and community members’ concerns about inadequate provision of charity care. Using data from public bond issues for California nonprofit hospitals, we find that hospital managers shift costs from bad debt expense to charity care in periods prior to a public bond issuance and that reporting lower-than-expected bad debt expense is associated with a lower cost of debt. Our results inform those relying on accounting measurements to infer nonprofit hospitals’ social good provisions and financial health.
Keywords: Nonprofit hospital; Earnings Management; Charity Care; Tax Exempt Debt; Municipal Bond Market; Cost of Debt
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