Do Public Enterprises Manage Earnings? Evidence from Germany

Earnings management is among the most extensively analysed topics of empirical accounting research since the 1980s. However, studies have focussed on commercial enterprises only and not yet properly covered the case of public enterprises. We try to close this research gap by modelling the management incentives to ma-nipulate earnings with reference to institutional economic theory. Based on that, we analyse the financial reporting of 14,800 German public companies over a period of 16 years. The data shows clear signs of earn-ings management for those public enterprises that are more independently run, rather detached from tradi-tional municipal activities, and operating in a more competitive market environment, which is in line with our theoretical model.