Earnings Management in Not-for-Profit Institutions: Evidence from Hospitals

40 Pages Posted: 1 Feb 1999

See all articles by Andrew J. Leone

Andrew J. Leone

University of Miami; Northwestern University

R. Lawrence Van Horn

Vanderbilt University - Strategy and Business Economics

Date Written: January 1999


This paper examines the incentives of CEOs in not-for-profit institutions to engage in earnings management. We predict and find that, with one exception, this different setting induces CEOs to engage in patterns of earnings management that are similar to those of their for-profit counterparts. This is noteworthy given that the structure of compensation and the objectives of not-for-profit organizations differ from for-profit firms. We examine the earnings management patterns of 744 not-for-profit hospitals (3,977 hospital-year observations) over an eight-year period from 1989-1996. The results suggest that similar to for-profit firms hospital CEOs 1) smooth earnings, 2) take a "big bath" with respect to discretionary accruals in the year of a CEO change, and 3) avoid small losses. Further, while not-for-profit CEOs avoid small losses, we find no evidence that CEOs manage earnings to avoid negative earnings changes, which is contrary to findings in the for-profit setting [Burgstahler and Dichev (1997)]. This is consistent with tax-exempt status restrictions implicitly limiting hospitals from reporting sustained patterns of profit growth. Overall, our results suggest that CEOs' reputation concerns, tax-exempt status restrictions, and debt costs drive earnings management decisions. Reputation appears to be a primary concern for CEOs in this industry because turnover is high and the frequency of earnings-based performance incentives is relatively small during the time period of our study.

JEL Classification: L31, I19, M41, M43

Suggested Citation

Leone, Andrew J. and Leone, Andrew J. and Van Horn, R. Lawrence, Earnings Management in Not-for-Profit Institutions: Evidence from Hospitals (January 1999). Available at SSRN: https://ssrn.com/abstract=146610 or http://dx.doi.org/10.2139/ssrn.146610

Andrew J. Leone (Contact Author)

University of Miami ( email )

School of Business
Coral Gables, FL 33146
United States
305-284-3101 (Phone)

HOME PAGE: http://sbaleone.bus.miami.edu

Northwestern University ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

R. Lawrence Van Horn

Vanderbilt University - Strategy and Business Economics ( email )

Nashville, TN 37203
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Abstract Views
PlumX Metrics