This paper analyzes the association between ownership, top management incentives, and expenditures on accounting information. We argue that organizations with privately appointed boards of directors such as for-profit and non-governmental nonprofit organizations use incentive pay practices which encourage managers to use accounting information to improve performance. In contrast, government organizations are publicly governed and are constrained in their compensation practices because hospital CEOs are administrators of government provided services. However, these hospitals must prove their efficiency to continue to receive adequate budgetary funding. Therefore government hospitals are more likely to use accounting information to gain legitimacy with stakeholders and regulators. Accordingly, we predict a positive relationship between expenditures on accounting information and contracting intensity in privately governed organizations, whereas we expect no such association for publicly governed organizations. We analyze data from California hospitals to determine differences in these roles across ownership types. We find a positive association between contracting intensity and expenditures on accounting information in privately governed hospitals, but no relation in publicly governed hospitals. Finally, we find differences in the use of accounting information within the privately governed hospitals, based on ownership. While for-profit hospitals expend resources on accounting information that helps improve their revenue positions, nonprofit hospitals expend resources on accounting information that facilitates decision-making related to operating efficiency and cost containment.

Recent accounting research provides evidence that similar profit‐based compensation incentives are used in for‐profit and nonprofit hospitals. Because charity care reduces profits, such incentives should lead for‐profit hospital managers to reduce charity care levels. Nonprofit hospital managers, however, may respond differently to the same incentives because they face a different set of institutional pressures and constraints. We compare the association between pay‐for‐performance incentives and charity care in for‐profit and nonprofit hospitals. We find a negative and significant association between charity care and our proxy for profit‐based incentives in for‐profit hospitals, and no significant association in nonprofit hospitals. These results suggest that linking manager pay to profitability does not appear to discourage charity care in nonprofit hospitals. Apparently, the nonprofit mission, institutional pressures, and ownership constraints moderate the potentially negative effects of profit‐based incentives. Because this evidence partially alleviates concerns over nonprofit compensation arrangements that mirror those used in for‐profit hospitals, it should be of interest to regulators and policymakers. In addition, this study provides insights into accounting researchers about institutional and organizational influences that affect managerial responses to financial incentives in compensation contracts.