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Electronic copy available at: http://ssrn.


Discussion of the Influence of Elections on the Accounting Choices of
Governmental Entities

Laurence van Lent
Department of Accountancy
Tilburg University

January 2012
(Prepared for the Journal of Accounting Research)

Kido, Petacchi and Weber [2012] investigate whether the occurrence of a state gubernatorial election is
important to understanding the accrual choices of preparers of the states comprehensive annual financial
report. Central to the authors argument is the idea that voters do not like budget deficits. Politicians, in
response, have incentives to use accounting choices to mask deficits in the period before elections.
Focusing on a specific accrual, the changes in compensated absences liability, the authors find evidence
that the discretionary part of this accrual is smaller in the period before an election, which is consistent
with politicians attempting to improve the picture of the states financial health. In addition, the authors
show that accrual manipulation is positively associated with the vote share of incumbent governors in
elections. In my discussion, I ask two questions: (1) how strong are governors political incentives to
manipulate accruals in the run-up to elections? (2) Can the association between discretionary
compensated absence accruals and elections be explained by forces other than politically motivated
accounting manipulation? I argue that the incentives to manipulate accruals might well be weak given
strong disciplinary mechanisms that induce politicians to transparency. Whats more, I document that
elections might produce patterns in state employment. As the compensated absences liability is linked to
the payroll, election-induced changes in state employment might be reflected in this accrual. Evidence of
an association between the compensated absences accrual and elections, then, does not necessarily imply
that politicians manage accounting numbers. To further illustrate this point, I show empirically that
gubernatorial elections have little explanatory power for state financial reporting choices that are
unaffected by state employment.

JEL classification: H70, H72, M41
Keywords: Gubernatorial elections, Accounting manipulation, Transparency

Chung-Yu Hung, Wim Janssen, and Huaxiang Yin provided excellent research assistance. I thank Valeri Nikolaev
and Ahmed Tahoun for very insightful discussions that yielded some of the ideas developed herein. I also appreciate
constructive feedback from Richard Leftwich (the editor) and Joe Weber. I am grateful to the Institute for Truth in
Accounting for making available their 2009 study on state budgets.
Electronic copy available at: http://ssrn.com/abstract=1980697

Discussion of the Influence of Elections on the Accounting Choices of
Governmental Entities

1. Introduction
In July 1787, General Henry Knox wrote to Rufus King, a delegate to the Constitutional
Convention meeting in Philadelphia, the vile state governments are sources of pollution which will
contaminate the American name for ages. Smite them, smite them, in the name of God and the people.

Whether or not Kido, Petacchi and Weber (henceforth, KPW[2012]) subscribe to General Knoxs view of
state governments, their findings certainly paint a picture of savvy governors using accounting discretion
to fool the electorate with a falsely rosy impression of the states financial health.
KPW add to a growing literature about how political forces affect accounting practices.
In a
twist, KPW focus on the accounting choices of U.S. states and ask whether the occurrence of a
gubernatorial election is important to understanding the accrual choices of preparers of the states
Comprehensive Annual Financial Report (CAFR). Their key argument is that politicians (eager to be re-
elected) address voters dislike for budget deficits by masking deficits in the period immediately before
the election through accounting choices. The authors introduce a specific accrual measure, namely, the
discretionary part of the compensated absences (CA) liability, to gauge the extent of accounting
manipulation. They validate this measure by showing that their main results obtain for another accrual
measure also, namely, the discretionary unfunded pension liability.
KPW present two sets of evidence. First, they show that the discretionary change in CA liability
is significantly lower in election years than in nonelection years. They further show that an election has a
weaker effect when states have good financial health, low political competition, high audit quality, high
preparer independence, and weak balanced budget requirementsin short, when incentives for
manipulation are weak. The authors follow these findings with an analysis of the association between the

Letter from General Henry Knox to Rufus King, 15 July 1787.
See, e.g., Ball [2008], Chaney, Faccio, and Parsley [2011], Guay [2010], Kothari, Ramanna, and Skinner [2010],
Ramanna [2008], Ramanna and Rowchowdhury [2010].

degree of CA accrual management and the vote share of the incumbent governor. The results in this
analysis are weaker but suggest that (at least marginally) incumbents with above-average accrual
manipulation tend to have larger vote shares.
Overall, the question KPW addressnamely, are elections associated with the incumbents
accounting choices?is highly relevant to public policy. Their premise is that governors are politically
motivated to manipulate accruals. My discussion addresses two questions around which much of the
debate during the conference developed: (1) what are governors incentives with respect to accounting
choices? and (2) do alternative explanations exist for the documented association between accrual
accounting and the occurrence of elections? First, I evaluate the maintained assumption in KPW that there
are political incentives to engage in accounting discretion in light of earlier evidence on the economics of
government transparency. Overall, the theory and empirical evidence presented in this literature shows
that while politicians may derive private benefits from accounting manipulation, strong disciplinary
mechanisms exist, which together yield incentives to be transparent. These incentives derive from voter
interests, capital markets, the media, and competition between political parties. Furthermore, I show that
the relation between gubernatorial job approval ratings (a good predictor of election outcomes) and state
budget deficits is weak in the KPW sample period. Consequently, governors seem to have little reason to
make accounting choices that reduce the reported deficit.
Second, with weak incentives to manipulate accruals, how should we interpret the association in
KPW between elections and accounting choice? I examine the alternative explanation that it is the accrual
manipulation measure in KPW itself that is affected by the occurrence of an election. Discretionary
compensated absences are modeled as a function of the states payroll. Conference participants discussed
the possibility that state employment changes systematically around elections and I show that the data
support this hypothesis. This employment effect can produce an accounting choice measure that varies in
election and nonelection years for reasons unrelated to accrual manipulation. Indeed, when I use measures
of government transparency from prior literature that are not affected by changes in state employment, I
find no election-year effect on transparency.

2. Transparency in government
It is worthwhile to place KPWs findings within the larger context of a growing theoretical and
empirical literature on the determinants and consequences of government transparency. The available
empirical evidence derives principally from data on U.S. states or from multicountry studies. The political
arena offers promising opportunities to study supply and demandside forces of transparency in a
potentially more multifaceted context than the one shaped by relations between a firm and its investors. I
will briefly review the extant literature next.
2.1 Voters and politicians
Voters benefit from government transparency in at least two ways. First, transparency helps
voters to screen incumbents of different types (say, upstanding versus self-interested politicians). Second,
transparency facilitates the observation of politicians actions. Better voter monitoring of incumbents has
a disciplining effect on politicians and prevents them from extracting rents [Alt and Lowry 2010, Besley
and Smart 2007].
Politicians, on the other hand, have strong incentives to be transparent because this pre-commits
against rent-seeking and thus increases their chances of winning their elections [Ferejohn 1999]. Voters
are more willing to trust transparent politicians with a larger public sector (i.e., fiscal scale), which in turn
allows politicians to increase spending on public goods and gain voters favor. Thus, an equilibrium exists
in which transparency improves voter welfare while offsetting the negative effects of budget deficits on
the incumbents chances of being re-elected [Besley 2006].
Consistent with this argument, Alt et al. [2006] document empirically that fiscal imbalances
(either surpluses or deficits) are a key determinant of increased transparency. Increased transparency is
associated with higher gubernatorial job approval [Alt, Lassen and Skilling 2002] and reduces the
negative effect of tax increases on incumbent governors chances of re-election [Alt and Lowry 2010]. In
a multicountry study, Alt and Lassen [2006] find that electoral cycles in fiscal balance exist in OECD
countries with low budget transparency but not in countries with high transparency. This evidence is

consistent with transparencys disciplining effect. Overall, the assumption that politicians have incentives
to be transparent is empirically supported and seems to be widely held in political science.
2.2 Financial markets and politicians
How financial markets shape government transparency has received far less attention in the
literature. Nevertheless, in an early study, Ingram [1983] finds little evidence that government accounting
practices directly affect sovereign bond yields, although bond ratings are associated with accounting
practices. In a multicountry study that carefully identifies this effect, Glennerster and Shin [2008] report a
significant impact of transparency on yields on sovereign bonds. Similarly, Gelos and Wei [2005] find
that transparency in a governments data and macroeconomic policy has a positive effect on investment
flows from international mutual funds. Finally, Carpenter et al. [2008] find that a U.S. states reliance on
short-term debt is a significant predictor of accounting choices. Together, these studies suggest that, as at
the corporate level, accounting choices at the government level are closely associated with incentives
deriving from capital markets.
2.3 Media and the legislative and executive branches
The medias role in monitoring the behavior of politicians is well documented [Snyder Jr and
Strmberg 2010]. While Gentzkow et al. [2009] document that media competition does not affect the
outcome of gubernatorial elections, Besley et al. [2002] argue that the media can change the structure of
salient electoral issues. The latter has received only modest attention in the accounting literature, but the
medias attention to balanced budgets, ballot initiatives on state finances, and state accounting practices
clearly informs variations in accounting choices and government transparency.

There also seems to be no discussion in the literature about how state legislators use financial
information (from the CAFR) in their constitutional role of monitoring the executive. Government-wide
financial statement information should facilitate legislators decisions on the new budget, provided the
government reports in a timely (before the legislature engages in the budget process) fashion and in a way

For example, the Chicago Sun-Times reported on the accounting treatment of pensions and OPEB and warned its
readers about its future (tax) implications. See: http://www.suntimes.com/business/savage/7069692-452/as-debt-

that enables representatives to assess the states financial health. States whose legislative branches are
stronger than their executive branches and with healthy amounts of political competition (i.e., in which no
one party has control) are expected to have a higher demand for transparency. The opponents of
incumbents who try to mask budget deficits have strong incentives to make this public (through the
media) and thereby discredit the current government and increase their own voter support.
The theoretical and empirical literature on government transparency surveyed here provides a
different perspective from the one presented in KPW. According to KPW, politicians increase their
chances of re-election by making accounting choices that reduce transparency;
moreover, they are more
motivated to do so when the states financial health is poor. In contrast, these political science and
economics studies on government transparency argue that transparency improves public monitoring of
politicians (who will respond by increasing their discipline and thus their chances of re-election). Whats
more, transparency makes unpopular fiscal policy choices such as tax increases and budget deficits more
palatable to voters, which again improves the policy-makers chance of re-election. Disciplinary forces
originating from financial markets, media, and political competition further reduce the private benefits of
poor transparency to politicians.
3. State balanced budgets, fiscally conservative voters, and accounting manipulation
KPW base their examination of the relation between gubernatorial elections and accounting
manipulations on the argument that voters care about the financial health of the state. A state that carries a
deficit is in worse condition than one that presents a surplus. Their findings would be more
conclusive had the authors provided direct evidence that voters actually care about budget deficits when
voting. Why else might politicians manipulate accruals? The extensive literature on voting behavior
generates two observations. First, there is little systematic evidence that budget deficits matter in
elections. Second, even if deficits do matter, they are likely less important than other determinants. I
provide more detail in what follows.
3.1 Do voters care about balanced budgets?

See also, Stiglitz [1999]who argues cogently that politicians may benefit from secrecy.

Peltzman [1992] memorably characterized American voters as fiscal conservatives who penalize
spending growth at both the state and federal levels. Notwithstanding this early evidence, the extent to
which economic factors, including budget deficits, affect gubernatorial vote choice has been the subject of
substantial debate in the political science literature and the same question was raised during the
conference. Indeed, one wonders why, if voters are truly fiscal conservatives, public spending grows.
Recent work suggests that the mechanism that relates state fiscal policy outcomes (such as a budget
deficit) to voting behavior is subtle. Lowry et al. [1998] show that voter reaction to fiscal policy depends
on whether a single party controls both the executive and legislative branches of government and whether
fiscal policy outcomes deviate from voter expectations. The more the branches are dominated by a single
party, the more voters will hold that party accountable for fiscal policy. They also find that, unlike
Republicans, Democrats are expected to provide a larger public sector and may even be rewarded for
increasing state spending. Thus, a balanced budget might not be particularly relevant when voters expect
(Democratic) governors to expand the public sector. These authors also find that voters care more about
the scale (i.e., the size) of state revenues and spending relative to the state economy than about the
balance of revenues and spending.
To examine the extent to which voters care about state budget deficits during KPWs sample
period, I collect data about the governors job approval rate (20052008) from the U.S. officials job
approval website maintained by the University of North Carolina.
I obtain budget balance data from each
states CAFR report. Table 1 reports the correlations between job approval ratings and the states budget
deficit, for the complete sample as well as by governor party affiliation. I consider separately the balance
of the initial legal budget, the general fund, and the change in net assets taken from the government-wide
financial statements.
As I discuss below, only the latter balance is prepared under full GAAP. I find
little evidence that deficits affect the approval scores of Republican governors. In contrast, higher deficits
on the legal budget and the general fund increase the approval ratings of Democratic governors, while a

The conference version of KPW did not specify which of these three alternative budget deficit definitions matter in
explaining voter reaction. Hence, I examine all three deficits.

negative change in net assets (GAAP deficit) decreases their ratings. This evidence belies any
straightforward relation between budget deficits and voter favor.
Although researchers continue to debate whether voters care about deficits, they generally agree
with Simons [1989] conclusion that the fortunes of gubernatorial candidates are tied to the public
standing of the president (pg. 301). Whats more, some studies find that nationwide macroeconomic
conditions may influence state elections as they do the states financial health [Niemi, Stanley and Vogel
1995, Partin 1995, Peltzman 1987]. Accordingly, voter concerns about state deficits may have a relatively
minor effect on their choice of candidates for the state executive offices. This finding also underlines the
need to control for variations in the presidents popularity and in national macroeconomic indicators when
conducting state-level analyses of election outcomes. The interrelations between factors at the state and
national levels might be subtle. A governor affiliated with the presidents party might take a dip in the
latters job approval ratings as a cue to engage in accounting choices that bolster their states reported
financial health. Indeed, if the presidents popularity is low, then a governor from the presidents party
might preemptively manipulate accruals to convince voters of their fiscal acuity.
3.2 Does manipulation of the compensated absence accrual matter to balancing the budget?
Regardless of whether a states financial health (i.e., having a balanced budget) is a material
determinant of voting behavior in gubernatorial elections, whether manipulating the CA accrual is an
effective way to accomplish a picture of more healthy state finances and/or of a balanced budget remains
an open question.
The CAFR report contains three separate sets of financial statements: (1) government-
wide statements, (2) government fund statements including the general fund, which may be subject to
balanced budget requirements, and (3) the budget. My concerns boil down to this: modified GAAP,
which forms the basis for general fund statements, prescribes a focus on the current financial resources.
As such, general fund statements reflect changes in financial resources available in the near future as a

Conference participants raised the question whether other accounting manipulations (compared with the
compensated absences liability) might not be more effective. In particular, participants suggested examining pension
liabilities. In the published version of their paper, the authors provide evidence of accounting manipulation in the
unfunded pension liability.

result of transactions or events of the fiscal period being reported [Ruppel 2010]. This focus differs from
the more familiar focus on economic resources, which is used in government-wide financial statements
wherein all transactions or events that affect the economic condition of the state are recorded.
Consequently, the balance sheet of the general fund will not record long-term liabilities (i.e., those that do
not require the use of current financial resources to pay them). Specifically, The long term portion of the
compensated absence liability will not be liquidated with the expendable available financial resources of
the governmental funds to which it relates and, accordingly, is not recorded in the fund [Ruppel 2010].
The compensated absence liability, manipulated or not, does not affect the general fund financial
statements, but only the government-wide financials. It is difficult, then, to see how exercising accounting
discretion over compensated absences will help governors to convince voters that the states budget is
balanced. There might be other reasons to manipulate the CA accrual, but its effect on the financial health
of the general fund might well be small.
This issue becomes even more salient in light of what follows. While government-wide and
government funds financial statements are prepared under (modified) GAAP, the same is not necessarily
true for the budget proposed by the governor and enacted by the state legislature. Thus, while the
modified GAAP treatment of compensated absences already prevents this liability from being
manipulated to affect the general funds financial position, states that do not use (modified) GAAP to
prepare their budgets may circumvent its disciplining effect. Indeed, in many cases, states may choose
which accounting principles to use in preparing their budgets.

Governors, keen to present voters with a balanced budget, may choose to prepare their budgets
using the accounting method that gives them the requisite flexibility to achieve this balance, at least in

Consider the following explanation from the Department of the Treasury of New Jersey: The States budgetary
basis differs from that utilized to present financial statements in conformance with GAAP. The main differences are
that under the budgetary basis, encumbrances are recognized as expenditures and the budgetary basis reflects
transactions only for the current fiscal year. In addition, the budgetary basis does not accrue the value of Food
Stamps. http://www.state.nj.us/treasury/omb/ReadersGuide/statefinpol.shtml

If achieving a balanced budget is what motivates governors to engage in accounting
manipulation, then the proper context for empirical investigation is the accounting basis for the budget as
opposed to the accounting basis for the government-wide or government funds financial statements.
There is so much discretion involved in preparing a budget that we might ask whether governors
even need to resort to accrual manipulation to achieve their aims. For example, some states do not budget
revenues, making it difficult to establish whether the budget is balanced.
Another example is the cash
basis used to calculate the budget, which reports long-term debt issued to finance current operating
expenditures as operating inflow rather than as a fund liability. Loan proceeds are treated as revenues.
To illustrate, the State of Illinois issued general obligation bonds in 2003 and used more than $2 billion of
the borrowings to pay for current pension contributions.
This is possible only because the loan proceeds
are funds available that can be spent in the current (balanced) budget [Institute for Truth in Accounting

In sum, it is not obvious that voters care about balanced budgets. Even if they do care, whether
their concern provides politicians with electoral incentives to engage in accrual manipulation to mask
budget deficits remains unclear. Accrual choices are unlikely to affect those financial statements that do
need to be balanced (i.e., the general fund and the legally adopted budget). Governors who wish to
manipulate the budget can formulate accounting policies for the budget (which is not governed under
GAAP) that facilitate such manipulation. Therefore, whether accounting manipulation fully explains the
documented correlation between elections and accrual choices in KPW remains an open question. I
provide one possible alternative explanation in what follows.
4. State employment surrounding elections and the accrual manipulation measure

While I am framing the arguments in terms of achieving a balanced budget, a similar reasoning applies to any
manipulation aimed at improving the reported financial health of the state.
Examples include Arizona, Arkansas, and South Dakota [Institute for Truth in Accounting 2009].
The State of Illinois is classified as a state with weak balanced budget requirements in KPW. Nevertheless, while
the incentive to manipulate accounting might be stronger when states have a balanced budget requirement, the
argument applies under KPWs assumption that voters care about the financial health of the state as measured by the
budget deficit/surplus.
Voters in California rejected Proposition 1C in the May 2009 ballotthis proposition would have allowed the
state to borrow money against future lottery proceeds and use those proceeds as inflows available for spending in the
current budget.

Political scientists have long observed that politicians seeking votes employ an excess of people
in public enterprises and government agencies [Dahlberg and Mork 2008, Shleifer and Vishny 1994].
Many jobs in the American political system are patronage jobs, subject to substantial turnover when
power changes hands after an election. Recent work suggests that the control of patronage jobs
significantly increases a U.S. political partys probability of winning state elections [Folke, Hirano and
Snyder 2011]. Obviously, the number of patronage jobs might be too small to have macroeconomic (i.e.,
state-wide) consequences. The argument, rather, is that governors use these jobs to secure the loyalty of
the party organization, which, in turn, gives incumbents access to party funds to finance their election
campaigns and to volunteers to help canvass votes. In other words, it is not that governors buy votes by
hiring more state employees, but that patronage provides the party with incentives to support governors in
their efforts to be re-elected.

If changes in state government employment indeed vary with the election cycle, then the accrual
manipulation measure described in KPWnamely, the discretionary part of the compensated absence
accrualbecomes difficult to interpret. Nondiscretionary and discretionary components are separated by
regressing the scaled compensated absences liability onto the scaled annual change in average base
monthly pay for full-time state employees (FIPoyroll). The FIPoyroll variable is itself susceptible to
election cycles in two ways. First, as conference participants pointed out, governors can try to win votes
from their state workers by increasing their salaries in the run-up to the election. Second, governors can
manipulate state employment by hiring more voters into government jobs. While FIPoyroll is possibly
not exogenous to political influence, its effect on the analysis in KPW is unclear.
The authors
discretionary accrual measure may reflect changes in state employment rather than accounting
manipulation. I provide some evidence consistent with this conjecture next.

These findings align with work on the existence of electoral budget cycles, which proposes that voters hold
politicians accountable for poor macroeconomic performance. Politicians respond by using expansionary fiscal
policy tools in the period prior to an election [Nordhaus 1975, Shi and Svensson 2006, Tabellini and Persson 2003,
Tufte 1978].
Indeed, the bias might work against KPW because part of the effect they are trying to document is captured when
the discretionary accrual component is computed. However, the endogeneity of FIPoyroll can also induce the
effect if the compensated absences liability change trails behind changes in payroll.

I collect data on the number of filled full-time equivalent positions at the end of each year in all
government funds for each state from The Fiscal Survey of States (19992009) published by the National
Association of State Budget Officers.
I compute %ChStateEmployment, the annual percentage change in
state employment, and plot this variable in event time (see Fig. 1), where year t = 0 is the fiscal year
before the election.

Figure 1 shows that reported state employment increases in the year leading up to the election and
decreases afterward.
I then adopt the regression specification in KPW (their equation 3) to model how
VoteRate, that is, the incumbent partys vote share in the general election, is associated with the change in
state employment. I keep all KPWs control variables but drop their accrual manipulation proxy, EM.
Table 2 presents the details. Like KPW, I present a regression with a logistic transformation of VoteRate.
I also include a logit regression in which the dependent variable is IncumbentWin, which equals 1 if the
incumbents party wins the election and 0 otherwise. Following KPW, I transform the variable of interest
%ChStateEmployment into an indicator variable D(%ChStateEmpl>mean) that equals 1 when the annual
percentage change in state employment is larger than the sample mean and 0 otherwise.
All three
models yield a similar conclusion: increasing state employment increases both the vote share of
incumbents as well as the probability of their winning the election.
All this is not to suggest that discretionary changes in compensated absences have no role in
explaining the outcome of gubernatorial elections. Indeed, the authors report that their results continue to

I use the NASBO survey for two reasons: (1) several of KPWs variables are constructed from the same source
and (2) the survey contains data reported by state budget officers, i.e., high ranking officials in the Executive Budget
Office. The latter is important for the following reason. A direct way of improving the perception of the financial
health of a state is to underreport the number of government employees. Thus, elections may affect the reporting of
state employment (as well as the actual hiring and firing of state employees). As NASBO relies on (voluntary)
reports by budget officers for compiling its survey, this practice is potentially observable. Perhaps for this reason,
the NASBO data contains some observations in which reported state employment changes by more than 50 percent.
Although I am using the same sample period as KPW, I include 105 gubernatorial elections whereas KPW include
only 92.
I obtain a similar graph using the median of changes in state employment or the mean of the cumulative density
function of changes in state employment (both of which reduce the effect of outlying observations).
This transformation also removes the effect of outlying observations in the NASBO data. In addition, my results
do not change materially if I winsorize %ChStateEmployment at the five percent level or use the cumulative density
function to compute the indicator variable.

hold after controlling for changes in state employment.
That said, both elections and the compensated
absences accrual may still be driven in part by politically motivated changes in state employment. Before
elections, governors may increase state employment, which, in turn, increases the payroll. The KPW
discretionary accrual model predicts higher expected accruals as a consequence of the increased payroll.
Since it takes time for employees to earn compensated absence allowances, the actual compensated
absence liability will not grow commensurately. Thus, the model potentially yields negative discretionary
accruals even without accounting manipulation. One conclusion that can be drawn from these analyses is
as follows. Separating explanations based on accounting manipulation from those based on economic
events occurring at the same time remains a difficult objective in this type of work (see also, Ball and
Shivakumar [2008]).
5. Some empirical evidence on government transparency
I started this discussion with a review of the importance of political and market incentives for
government transparency. While prior work documents that politicians have strong incentives to be
transparent, these incentives are not necessarily linked to elections. In this section, I examine these ideas
more closely and present some initial results on how demand and supply forces affect state government
transparency. Doing so allows us to better understand the association between elections and accrual
manipulation documented in KPW. If elections truly affect government transparency choices, then we
should see a similar election effect on other measures of transparency. If the election effect on the
compensated absences accrual, on the other hand, derives (in part) from politically motivated changes in
state employment, then we should not observe an association between elections and these other
transparency measures that do not vary with changes in state employment. As transparency choices
(including accounting manipulation and disclosure quality) tend to be complementary, we can reasonably
assume that my set of measures is subject to the same political and market forces as the accrual measure
in KPW is. The analysis is somewhat crude, and I intend only to highlight some interesting associations in
the data, without making any claims of causality.

In private correspondence after the authors received an earlier draft of this discussion.

I consider four simple measures of government transparency: (1) Reporting lag, the number of
days between the fiscal year end and the publication date of the CAFR, (2) D(Big4Auditor=1), an
indicator variable that equals 1 if the states financial statements are verified by a Big 4 audit firm and 0
otherwise, (3) # of Pages in CAFR, the total number of papers in the CAFR, and (4) # of Pension pages in
CAFR, the total number of pages devoted to pension-related information in CAFR. These measures have
been used frequently in prior literature [Atiase, Bamber and Tse 1989, Leuz and Schrand 2009], with the
exception of the # of Pension pages in CAFR, which I use because the states pension obligations were a
growing concern among voters, the press, and accounting regulators in the sample period (20052008). I
regress each of these transparency measures onto proxies that capture the relation between governors and
(1) voters, (2) financial markets, (3) legislators, and (4) the media. For the sake of brevity, I provide
details about data sources in the notes to Table 3.
Table 3, Panel A reports summary statistics on all variables used in the regression analysis; Panel
B presents the estimation results. In contrast to the findings presented in KPWnamely, that
discretionary compensated absences accruals are significantly different in election yearsI find no
evidence of an association between the years in which a gubernatorial election occurs D(Election=1) and
any of the government transparency measures. Consistent with the predictions of the political science
literature, however, I find that states that report a budget deficit D(Deficit>0) take fewer days to publish
their annual financial statements and are more likely to engage a Big 4 audit firm (p-value = 0.104). In
terms of economic significance, the probability that a Big 4 auditor will verify the financial statements is
about 9 percentage points higher for deficit states than for surplus states. These associations are to be
expected if transparency indeed helps governors to convince voters that a bigger public sector is
I follow Carpenter et al. [2008] and proxy for a states dependence on (frequent) access to debt
markets by computing Per capita short-term debt, a states short-term indebtedness per capita. If a state
relies on credit markets to partially finance its current operations, then the demand for timely and

informative financial statement information will be higher.
Indeed, I find that Per capita short-term debt
is negatively associated with Reporting lag and positively associated with # of Pages in CAFR.
Governors with weaker electoral positions or with fewer constitutional powers might be less able
to withstand pressures for more transparent government. I use the governors margin of victory in the
most recent gubernatorial election (Election margin) as a measure of a states degree of political
competition. The Governors institutional power measure is based on an index provided by Beyle.

Larger victory margins are associated both with thinner CAFR reports and fewer pages on pensions and
with an increased probability of engaging a Big 4 audit firm. Governors with more institutional powers
have lower reporting lags (perhaps because they have to consult with fewer parties before publishing the
statements) and are more likely to employ a Big 4 audit firm.
I investigate the role of the media by counting the number of newspaper reporters assigned to
cover the state capitol (# of Reporters in state capitol). I find that the writing press has a significant role in
government transparency. While the length of reporting lags increases with the number of reporters, the
likelihood that a Big 4 firm verified the financial statement also increases, as does the number of pages in
the CAFR. In particular, states with more reporters have significantly more pages on pension-related
issues. This latter finding is consistent with the argument presented in Besley et al. [2002], namely, that
the press can change how policies on the agenda get prioritized. One interpretation of these results, which
supports conjectures made during the conference, is that the press highlights concerns about the states
obligations with regard to pensions and that governors respond with more transparency on the issue. They
also suggest an indirect channel through which the media can affect electoral outcomes, notwithstanding
the evidence in Gentzkow et al. [2009] that media competition does not directly influence the vote share

Note that securities of state governments are exempted from registration with the SEC. (See:
http://www.unc.edu/~beyle/gubnewpwr.html. The index is based on the following categories: (1) whether the
states executive branch officials are separately elected or appointed by the governor, (2) the tenure potential of the
governor (e.g., the presence of term limits), (3) the governors appointment powers in major functional areas (e.g.,
education, corrections), (4) the governors budget power, (5) the governors veto power, and (6) gubernatorial party

in gubernatorial elections. Indeed, media can increase the transparency of state government, and voters
may prefer more transparent incumbents.
Together, these results document an association between government transparency and supply-
and-demand forces, much as economic theory predicts. In contrast to KPWs findings, however, I find
little support for regarding differences in transparency as deriving from the occurrence of an election.
6. Conclusions
KPW document how election-related incentives influence state government accounting choices.
They show that, around elections, governors are more likely to reduce the discretionary change in
compensated absences liability, arguably to improve the picture voters have of the states financial
health. This practice appears to be a rational strategy for politicians; subsequent evidence in KPW shows
that in states with above-average accrual manipulation, the incumbents vote share during elections is
significantly higher.
I have focused my discussion on two questions: (1) how strong are governors political incentives
to manipulate accruals in the run-up to elections? and (2) can the association between discretionary
compensated absence accruals and elections be explained by forces other than politically motivated
accounting manipulation?
I argue that election-related incentives to engage in accounting manipulation might well be weak.
Indeed, prior work emphasizes disciplinary mechanisms that provide politicians with incentives to be
transparent notwithstanding any private benefits deriving from accounting manipulation. In addition,
voters may only care about balancing the budget if they expect a governor to balance the budget during
their tenure. On average, budget deficits seem to have little effect on the governors job approval rating.
In addition, as the accounting for state budgets proceeds on a cash basis, it is unlikely that accrual
manipulation is needed to produce a balanced budget or will improve the picture of the states financial
health. Indeed, since states can define the accounting policy for preparing the budget and thus achieve
balance in other relatively easy ways, it is not obvious why states would resort to accrual manipulation.

The association between elections and the discretionary accrual measure in KPW may reflect an
alternative scenario. State employment (i.e., the payroll) is affected by political decision-making and will
vary systematically with each election. As KPW use the payroll to derive their discretionary accrual
measure, their findings must be interpreted with care. Indeed, I find that state employment is a direct
predictor of the incumbents election success. I also show empirically that the occurrence of an election
has little explanatory power with regard to government transparency choices unaffected by state
employment. In contrast, such factors as the institutional power of the governor, the presence of the
media, and the states dependence on credit markets explain a substantial part of the variation in
government transparency.


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Figure 1
Percentage Change in State Employment around Gubernatorial Elections

This figure graphs the percentage change in state employment (i.e., the number of full-time equivalent
positions filled in government funds in each state) around a gubernatorial election year (t = 0).




-1 0 1 2
Event year

Correlations between Governors Job Approval Rating and the State Budget Deficit

The table presents Pearson correlations between gubernatorial job approval ratings and the states budget
deficit. Data on the governors job approval rating and party affiliation is taken from the US officials job
approval ratings website maintained by UNC. Budget deficit data is drawn from the states CAFRs. The
sample period is 20052008. Budget balance is the balance of the initial legal budget according to the
budgetary comparison schedule. The general fund balance is the balance of the states general fund.
GAAP balance is the change in net assets from the Government-wide Statement of Net Activities. All
balances are scaled by the states population. *, **, *** indicate significance at the 10%, 5%, and 1%
levels, respectively. The number of observations is 142.

Per capita budget
Per capita general fund
Per capita change in
net assets (GAAP
Job approval rating:
All governors 0.10 0.03 0.14*
Democratic governors 0.19 0.26** 0.47***
Republican governors 0.21* 0.09 0.14


Gubernatorial Election Outcome and Changes in State Employment
This table reports regression results of the following equation,
= [
+ [
(%CbStotcEmpl > mcon) +[
0ooJFinonciol + [
+ [
Incumbcnt + [
unitcJ + [
IcrmIimit +[
Rcp +e
where ElectionOutcome is VoteRate in model (1), a logistic transformation of VoteRate in model (2), and
IncumbentWin in model (3). Robust standard errors are in parentheses. P-values are one-tailed for
variables with the predicted sign and two-tailed for variables without the predicted sign. *, **, ***
indicate significance at the 10%, 5%, and 1% levels, respectively. Data sources for all variables, except
D(%ChStateEmpl>mean), are described in KPW. D(%ChStateEmpl>mean) is an indicator variable that
equals 1 if the percentage change in state employment is above the sample mean and 0 otherwise. State
employment data is taken from The Fiscal Survey of States (19992009) published by the National
Association of State Budget Officers.

(1) (2) (3)
Sign VoteRate Log[VoteRate/1 VoteRate] IncumbentWin

D(%ChStateEmpl>mean) + 0.045** 0.173** 1.023**
(0.019) (0.081) (0.531)
GoodFinancial + 0.045*** 0.152*** 0.968**
(0.018) (0.075) (0.486)
Spending 0.059*** 0.262*** 0.239
(0.024) (0.106) (0.696)
Incumbent 0.092*** 0.395*** 1.976***
(0.028) (0.124) (0.593)
United 0.006 0.010 0.198
(0.019) (0.076) (0.481)
TermLimit 0.007 0.062 0.129
(0.032) (0.118) (0.646)
Rep 0.027 0.080 0.173
(0.021) (0.083) (0.483)

Constant 0.423*** 0.272** 1.105*
(0.033) (0.135) (0.634)

Observations 105 104 105
Adj. or Pseudo R-squared 0.278 0.263 0.1911
F-statistic or _
4.988 5.871 22.77
p-value 0.00 0.00 0.00


Demand and Supplyside Factors of Government Transparency
The table reports regression results of the following equation,
0o:Ironsp = [
(cicit > u) + [
(Elcction = 1) + [
Pcr copito sbort tcrm Jcbt + [
Elcction morgin
+ [
s institutionol powcr + [
# o Rcportcrs in stotc copitol + [
Iog o stotc populotion + e
where GovTransp is Reporting lag, the number of days between the fiscal year end and the date on the CAFR preparers transmittal letter included
in the report, D(Big4Auditor=1) is an indicator variable that equals 1 if the states financial statements are audited by one of the Big 4 audit firms
and 0 otherwise, # of pages in CAFR is the number of pages contained in the CAFR, and # of pension pages in CAFR is the number of pages
devoted to pension-related issues. D(Deficit>0) is an indicator variable that equals 1 if the state reports a budget deficit and 0 otherwise,
D(Election=1) is an indicator variable equal to 1 if a gubernatorial election occurs during the year and 0 otherwise, Per capita short-term debt is
the states short-term indebtedness per capita, Election margin is the margin of victory of the winner of the most recent gubernatorial election,
Governors institutional power is Beyles index of gubernatorial institutional power, # of Reporters in state capitol is the number of newspaper
staff reporters who cover the state capitol full time, and Log of state population is the natural logarithm of the states population (in thousands).
Robust standard errors are in parentheses. P-values are two-tailed. , *, **, *** indicate significance at the 15%, 10%, 5%, and 1% levels,
respectively. Data on budget deficits and GovTransp measures are taken from each states CAFR. Population and short-term debt data is provided
by the U.S. Census Bureau. Election data are drawn from CNNs election coverage. Governor institutional power data is provided by Professor
Thad Beyle. I use the 2009 American Journalism Reviews survey of state government coverage to obtain data on the number of newspaper
reporters assigned to the capitol. The sample period is 20052008.

Panel A: Summary statistics
VARIABLES Mean Std. Dev. 5% Median 95%
Reporting lag 207.07 78.79 137.00 181.00 330.00
D(Big4Auditor = 1) 0.15 0.36 0.00 0.00 1.00
# of Pages in CAFR 215.24 55.75 140.00 202.50 320.00
# of Pension pages in CAFR 6.31 4.84 2.00 6.00 12.00
D(Deficit>0) 0.50 0.50 0.00 0.50 1.00
D(Election =1) 0.26 0.44 0.00 0.00 1.00
Per capita short-term debt ($) 0.03 0.05 0.00 0.01 0.13
Election margin 15.96 12.79 1.51 12.74 43.87
Governors institutional power 20.72 2.45 17.00 21.00 24.50
# of Reporters in state capitol 7.10 5.34 2.00 5.00 18.00
Log of state population 8.21 1.02 6.46 8.36 9.87


Panel B: Regression results
(1) (2) (3) (4)
VARIABLES Reporting lag (rank) D(Big4Auditor = 1)
# of pages
in CAFR (rank)
# of pension pages
in CAFR (rank)

D(Deficit > 0) 4.550** 0.843 0.939 0.403
(2.047) (0.518) (1.801) (2.041)
D(Election = 1) 0.055 0.301 0.403 1.548
(2.184) (0.448) (2.044) (2.171)
Per capita short-term debt 39.907*** 1.205 56.342*** 14.290
(10.017) (3.569) (15.277) (12.400)
Election margin 0.106 0.031* 0.136* 0.317***
(0.079) (0.018) (0.071) (0.082)
Governors institutional power 0.823** 0.171* 0.275 0.355
(0.405) (0.101) (0.396) (0.363)
# of Reporters in state capitol 0.820*** 0.111** 0.511** 1.208***
(0.271) (0.045) (0.238) (0.229)
Log of state population 2.887* 0.598* 3.090** 5.558***
(1.497) (0.325) (1.362) (1.411)
Constant 61.241*** 2.438 8.769 58.537***
(12.049) (3.441) (11.103) (11.929)
Observations 192 195 194 193
Adj. or Pseudo R-squared 0.094 0.121 0.225 0.123
F-statistic or _
8.340 22.890 9.950 7.508
p-value 0.000 0.002 0.000 0.000