Municipal organizational structure and financial reporting quality

48 Pages Posted: 28 Mar 2021 Last revised: 17 Sep 2023

See all articles by Inna Abramova

Inna Abramova

London Business School

Jacquelyn Gillette

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Joseph Weber

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Date Written: August 2023

Abstract

We examine how the quality of financial reporting is connected to the organizational design of
municipal entities. Theory suggests that organizational design choices, like the breadth of
responsibilities afforded to an agent and the prominence of the financial reporting function within
the organization, are likely to affect economic outcomes. We focus on the quality of the accounting
system and the city's cost-of-capital and test these theories using a novel database of California
cities from 2014 to 2018. We find that financial reporting quality increases with finance managers’
breadth of responsibility and decreases with the city’s depth of bureaucracy. Our findings are
similar using within-city variation and after instrumenting for the city’s organizational structure
using weather shocks and election outcomes. We also demonstrate that the depth of bureaucracy
and the breadth of responsibilities are associated with the cost of debt. Further, we study the
determinants of the municipal organizational structure and show that the breadth of responsibility
and the depth of bureaucracy depend on the population density and diversity, resources spent on
the administrative function, GDP, and the charter status of the city. Our findings suggest that the
variation in the design and responsibilities associated with the financial reporting function affects
accounting and cost-of-capital outcomes.

Keywords: Municipal accounting, municipal organizational structure, Finance Director, CFO, Accounting Quality, extreme weather

JEL Classification: M40, H70, H72, H74

Suggested Citation

Abramova, Inna and Gillette, Jacquelyn and Weber, Joseph Peter, Municipal organizational structure and financial reporting quality (August 2023). Available at SSRN: https://ssrn.com/abstract=3801262 or http://dx.doi.org/10.2139/ssrn.3801262

Inna Abramova

London Business School

Regent's Park
London, NW1 4SA
United Kingdom

Jacquelyn Gillette (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Ave. E62-663
Cambridge, MA 02142
United States

Joseph Peter Weber

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States
617-253-4310 (Phone)

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