Association for Public Policy Analysis & Management

Does the council–manager form of government lead to more accountable financial management than the mayor–councilform of government? If so, how is the difference in management between the two forms of government associated with municipal bond credit ratings? The mayor–council government tends to be more responsive to its constituents, as it focuses on short-term electoral interests, but it increases the community’s financial burden in the long run (Feiock et al., 2003; Lineberry and Fowler, 1967). Notably, the political incentives of mayors and council members to be reelected have been considered to be major reasons forthe decreasedlevels of government efficiency and corruption. On the basis of this assumption, scholars have investigated the impact of the form of government on municipal expenditures, debt, and tax rates (French, 2004; Sherbenou, 1961). They found that the council–managergovernment, which constrains the opportunisticbehaviors of politicians, is more likely to lead to responsible financial management than the mayor–councilgovernment (Feiock et al., 2003; French, 2004). By contrast, few researchers have studied whether the different managementstyles associated with government structures are related to municipal bond credit ratings, although the credit quality of municipal bonds is a crucial factor in local borrowing costs. To address this research gap, we test whether the form of government is associated with municipal bond credit ratings. We use the 2011 survey data from the International City/County Management Association on 3,566 municipalities and the underlying credit rating information from major credit rating agencies. To test our hypothesis, we use ordered probit estimation and control for economic, demographic, and financial factors that are likely to affect credit ratings. This paper contributes to developing the knowledge about the links between management and municipal bond credit ratings, and the results provide policy implications that may help improve thefinancial management of governments.