Debt incentivised income smoothing in Polish municipally-owned companies

Abstract

This paper examines the sensitivity of Polish municipally-owned companies’ (MOCs’) income-smoothing behaviour to leverage compared to private firms, considering leverage distribution and types of municipal ownership. On the one hand, local governments (LGs) with limited fiscal autonomy may use unconsolidated MOCs to bypass budgetary constraints. Such off-budget financing may incentivise income smoothing to meet debt covenants and reduce financing costs. On the other hand, those MOCs under public owners’ guarantees face soft budget constraints and potential bailouts. Therefore, they can be less motivated to make a smooth income. We intend to identify which motive prevails.