Does Financial Slack Reduce Municipal Short-Term Borrowing?
*Names in bold indicate Presenter
We use a sample of municipal governments in California, because California is among the states where local governments actively issue short-term debt for cash management purpose. We collect data from multiple sources, including the California Debt and Investment Advisory Commission’s Debt Issuance Database, the Government Financial Officers Association’s Financial Indicator Database, and the Census Bureau’s Local Government Finance Database. The time span of this study is between fiscal years 2003 and 2012. We use a dichotomous variable which is coded 1 if a municipal government issues any cash management notes in a fiscal year and 0 otherwise as the dependent variable to test the first hypothesis. We use the ratio of total cash management notes to total current expenditures as the dependent variables to test the second hypothesis. We use the unreserved undesignated general fund balance lagged by one year as the independent variable. Our model also incorporates a group of control variables that are hypothesized to affect a municipal government’s cash flow management choice.
Our study extends the application of pecking order theory to municipal finance. It contributes to the increasing literature on municipal financial slack and municipal short-term debt financing. It sheds light on municipal cash management as well. We expect findings from this study to provide insights into municipal financial management, in particular municipal governments’ decisions to choose between internal financial resources and external financial resources.
Myers, Stewart C., and Nicholas S. Majluf. "Corporate Financing and Investment Decisions When Firms Have Information That Investors Do Not Have." Journal of Financial Economics 13, no. 2 (1984): 187-221.