Can better financial conditions lead to more fiscal transparency? Evidence from municipalities in California

Fiscal transparency is widely promoted as an effective means to achieve government accountability. Although scholars have explored various drivers of fiscal transparency, the relationship between a government’s financial condition and fiscal transparency has received less attention. This study explores this relationship based on signalling, blame-avoidance, and resource hypotheses. Presuming that following the best practices in financial reporting leads to a higher degree of fiscal transparency, this study examines how a local government’s financial condition is associated with the probability of having a certification that represents the quality of financial reporting. Using a sample of municipalities in California from 2003 to 2015, we find that municipalities with a higher debt level and a lower fund balance ratio are more likely to pursue fiscal transparency in financial reporting.