The information relevance of GAAP-based aggregate spending measures for state economic growth

This study investigates the relevance of state governments' aggregate spending, as reported in audited GAAP-based financial statements, to state economic performance. Utilizing a dynamic panel model to address endogeneity and heterogeneity concerns, the study examines the informativeness of full-accrual and modified-accrual accounting measures for governmental activities and full-accrual accounting measures for business-type activities. The results reveal a negative and statistically significant association between GAAP-based spending measures and state economic growth, suggesting that these measures contain information about economic performance. Additionally, controlling for state-specific heterogeneity enhances the model's explanatory power by 18%, underscoring the importance of accounting for cross-sectional differences in state economies. The findings do not provide evidence that full-accrual measures offer incremental informational relevance beyond modified-accrual measures in explaining state economic growth, consistent with the Governmental Accounting Standards Board's (GASB) view that modified-accrual accounting is more relevant for evaluating short-term fiscal performance. This study highlights the advantages of audited, GAAP-based financial statement data over fiscal data sources that are not independently audited, emphasizing the credibility and consistency of audited reports. The research contributes to the literature by demonstrating the critical role of governmental financial reporting in explaining economic outcomes and promoting public accountability. The results offer important implications for policymakers and standard-setters, suggesting that GAAP-based financial reporting facilitates more informed decision-making regarding resource allocation in state governments.