Knowledge that Transforms

After 1983, Medicare paid hospitals for inpatient services at fixed rates, but continued to reimburse outpatient services based on reported cost. Using data from Washington State we find that hospitals responded by increasing outpatient services to Medicare patients compared to non-Medicare patients-the ratio of Medicare outpatient revenues as a percentage of total Medicare revenues increased after 1983 to a significantly greater extent than for non-Medicare patients. We also find that allocations of overhead costs to outpatient departments increased after 1983. These findings suggest that hospitals change their patient mix and cost allocations to maximize hospital cash flows.

This paper provides evidence on whether managers can reduce stockholder litigation costs by disclosing adverse earnings news ‘early’. Inconsistent with this idea, I find that voluntary disclosures occur more frequently in quarters that result in litigation than in quarters that do not. However, this result occurs because managers' incentives to predisclose earnings news increase as the news becomes more adverse, presumably because this reduces the cost of resolving litigation that inevitably follows in bad news quarters. After controlling for these incentives using estimated stockholder damages, I find some evidence that more timely disclosure is associated with lower settlement amounts.

This study tests political costs theory by examining the cable television industry during periods of Congressional scrutiny. Earnings management is measured using discretionary accruals, and data are consistent with managerial incentives to mitigate the effects of political scrutiny and potential industry reregulation. Tests are also done using within-sample comparisons of firms. Firms for which proposed regulations are expected to be more harmful have greater income-decreasing accruals, and for some tests, firms for which cable television operations are more important have greater income-decreasing accruals. Test results are robust to the inclusion of control variables for firm performance and size.