Events calendar

15.00 - 16.30 Monday 15 Apr 2013

On campus - London - United Kingdom

Accounting Seminar Series

Speaker(s): Joseph Weber (MIT)

The Hidden Consequences of Balanced Budget Requirements

This paper investigates the potential unintended consequences of balanced budget requirements. The goal of balanced budget provisions is to enhance state government accountability by curtailing deficit spending. Consistent with this idea, Poterba (1995) finds that in economic downturns states with strong balanced budget requirements are more likely to cut spending than states that have weak balanced budget rules. In this paper, we extend Porterba’s analysis, investigating the other actions states take when facing balanced budget requirements. We find that when facing fiscal problems, state governments tend to sell public assets and engage in accounting gimmicks like inter-temporal shifting of expenses to meet balanced budget requirements. We also find that the assets are more likely to be sold at a loss in states facing strict balanced budget requirements, suggesting that balanced budget requirements may increase the chances of states having fire sales. We conclude our analysis by investigating the interaction between the use of accounting gimmicks and asset sale behavior, finding that states are less likely to sell assets if they shift expenses into future periods. Overall, the results of this paper should be interesting to both academics and practitioners. Specifically, our paper provides evidence on the consequences of control mechanisms, and highlights the tradeoffs between accounting discretion and asset sale behavior in a governmental setting. In particular, there has been a mounting criticism against the discretion in state government accounting choices, and our paper highlights some of the benefits of this discretion.

Event location

PLG02

Download: JWeber Workshop Paper 15Apr13.pdf (331.39 KB)
Contact: Debbie Hughes - Email: dhughes@london.edu Tel: +44 (0)20 7000 8120