The effects of the new fiscal rule and creative accounting: Empirical evidence from Japanese municipalities

Hirota, Haruaki and Yunoue, Hideo (2017): The effects of the new fiscal rule and creative accounting: Empirical evidence from Japanese municipalities.

Abstract

The purpose of this paper is to analyze stock-flow adjustments of creative accounting in Japanese municipalities after the introduction of a new fiscal rule using a difference-in-differences method. We contribute to the literature of creative accounting by analyzing the interdependency of the new fiscal indexes, which include three flow indexes and one stock index, and by identifying the impacts of the new fiscal rule. In addition, we focus on both the ``targeted indexes'' and the ``untargeted indexes'' of the new fiscal rule because some of the municipalities might take advantage of loopholes in the new fiscal rule to improve their ``targeted indexes''. Our main contribution is the finding that the municipalities increase their money transfers to the public enterprise accounts, which is one of the ``untargeted indexes'', after the introduction of the new fiscal rule to avoid the applicable punishments. This phenomenon is creative accounting because the municipalities postpone improving their true fiscal deficits.

• Item Type: MPRA Paper
• Language: English
• Keywords: fiscal rule, creative accounting, stock-flow adjustments
• Subjects: H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H72 - State and Local Budget and Expenditures; H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H74 - State and Local Borrowing; H - Public Economics > H7 - State and Local Government ; Intergovernmental Relations > H77 - Intergovernmental Relations ; Federalism ; Secession

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