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Fiscal rules and creative accounting: Evidence from Japanese municipalities

Hirota, Haruaki and Yunoue, Hideo (2017): Fiscal rules and creative accounting: Evidence from Japanese municipalities.

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The purpose of this paper is to analyze the fiscal effects and creative accounting by stock-flow adjustments in Japanese municipalities after the introduction of a new fiscal rule using a difference-in-differences method. We contribute to the literature on creative accounting in the following three ways. First, we focus on the interrelationship of the new fiscal indexes that include three flow indexes and one stock index. Second, we investigate the stock-flow adjustments regarding the relationship between the increase in the change in debt stock and the decrease in the deficit to measure creative accounting. Third, we reveal the kinds of expenditures and revenues that affect the deficit. Our main contribution is the finding that the municipalities engage in stock-flow adjustments while improving the new fiscal indexes through intergovernmental transfers. This phenomenon is creative accounting because the municipalities delay improving their fiscal deficits.

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