Ownership type and earnings management in U.S. hospitals

We examine variation in accrual-based and real earnings management in U.S. hospitals by ownership type, using a stable comprehensive sample of hospitals from 2011 through 2016. We expect managers' reporting incentives to differ between ownership type (for-profit versus non-profit), resulting in differing uses of accrual and real earnings manipulations. First, we document that non-profit hospitals exhibit lower levels of both income-increasing and income-decreasing earnings manipulations than for-profit hospitals do. Second, we find that compared to non-profit hospitals, for-profit hospital managers use discretionary accruals (in particular) to create larger reserves when pre-managed earnings are high and to increase reported earnings more when pre-managed earnings are low. Together, these findings suggest that, relative to non-profit hospital managers, for-profit hospital managers have incentives to report higher and more consistent earnings.