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Proportional appropriation systems and financial statement quality in municipally owned entities: empirical evidence from Italy

Francesco Capalbo (Department of Economics, University of Molise, Campobasso, Italy)
Luca Galati (Department of Economics, University of Molise, Campobasso, Italy) (Faculty of Business and Law, School of Business, University of Wollongong, Wollongong, Australia) (Rozetta Institute, Sydney, Australia)
Claudio Lupi (Department of Economics, University of Molise, Campobasso, Italy)
Margherita Smarra (Department of Economics, University of Molise, Campobasso, Italy)

Journal of Public Budgeting, Accounting & Financial Management

ISSN: 1096-3367

Article publication date: 5 September 2023




This paper aims to examine how proportional appropriation systems affect the quality of financial reporting in entities controlled by local governments.


The authors examine this issue using the setting of Italian municipally owned entities (MOEs) following the implementation of a new accounting regulation that limits the spending power of the participating municipality when the owned entity reports losses. The authors apply Benford's law on net income figures using the Chi-square and Z-tests on the adjusted version of the Mean Absolute Deviation (MAD) criterion to spot any sign of low data quality. The sample, which consists of 2,120 MOEs, covers the years 2010–2019 and is evenly divided into the periods pre- and post-policy introduction.


Widespread data anomalies were detected following the introduction of the new regulation for MOEs controlled by local governments. Evidence is stronger for entities owned entirely by municipalities. The results suggest that the extent of data manipulation grows as the municipality's ownership stake increases, consistent with the hypothesis that a decrease in spending power through the appropriation of financial resources affects earnings management practices in municipally controlled entities.

Practical implications

This paper sheds light on government-based accounting policies by documenting evidence of somewhat inefficient responses by those responsible for the preparation of financial statements on behalf of municipally owned entities, and, accordingly, insights are provided to help review these policies so as to forestall even indirectly detrimental repercussions on public services.


This paper extends prior research in public-sector earnings management by being the first to test whether MOEs manipulate their earnings as a consequence of participating municipalities' reduced spending capability. Understanding factors influencing earnings management practices driven by governments, other than political incentives, is still an open issue.



The paper benefited from comments of two anonymous reviewers, the editors of this special issue, and participants at the 2022 JPBAFM conference on earnings management in public sector accounting, the ninth EIASM Workshop on Accounting and Regulation in 2023, and the VI Accounting Summer Camp 2023 at the University of Padua. This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors. The data that support the findings of this study are available from Bureau van Dijk, a Moody's Analytics but restrictions apply to the availability of these data, which were used under license for the current study, and so are not publicly available. Data are however available from the author upon reasonable request and with permission of Bureau van Dijk, a Moody's Analytics. The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.


Capalbo, F., Galati, L., Lupi, C. and Smarra, M. (2023), "Proportional appropriation systems and financial statement quality in municipally owned entities: empirical evidence from Italy", Journal of Public Budgeting, Accounting & Financial Management, Vol. ahead-of-print No. ahead-of-print.



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