The Influence of Elections on the Accounting Choices of Governmental Entities

This paper investigates whether gubernatorial elections affect state governments’ accounting choices. We identify two accounts, the compensated absence liability account and the unfunded pension liability account, which provide incumbent gubernatorial candidates with flexibility for manipulation. We find that, in an election year, the liability associated with compensated absences and unfunded pension liabilities are both systematically lower. We also find that the variation in these employment‐related liabilities is correlated with proxies for the incumbent's incentives and ability to manipulate their accounting reports. Jointly, these results suggest that state governments manipulate accounting numbers to present a healthier financial picture in an election year.     

Do Rating Agencies Benefit from Providing Higher Ratings? Evidence from the Consequences of Municipal Bond Ratings Recalibration

We ask whether credit rating agencies receive higher fees and gain greater market share when they provide more favorable ratings. To investigate this question, we use the 2010 rating scale recalibration by Moody's and Fitch, which increased ratings absent any underlying change in issuer credit quality. Consistent with prior research, we find that the recalibration allowed the clients of Moody's and Fitch to receive better ratings and lower yields. We add to this evidence by showing that the recalibration also led to larger fees and to increases in the market shares of Moody's and Fitch. These results are consistent with critics’ concerns about the effects of the issuer‐pay model on the credit ratings market.