Identifying the Moderator Factors of Financial Performance in Greek Municipalities

Abstract

The use of financial ratios is a widespread method for assessing the financial performance of private sector companies. However, the application of an analogous exercise in the public sector is a less straightforward one. In the later case it is a multifaceted task that involves judgments about the interplay of complex social, organizational and financial factors. In this paper we use accrual end of the year financial statements data of Greek Municipalities for the period 2002–2004 to compute nine commonly used performance assessment financial ratios. We find corroborative evidence that factors, which are exogenous to the municipalities’ control, such as their wealth and size, have statistically significant impact on ratio values. Thus, as financial ratios are significantly influenced by socio‐economic factors like municipal wealth and size, cross sectional comparisons on the basis of these ratios should be made with caution and performed for municipalities that exhibit similarities in terms of size and wealth.

Financial Distress of Local Government : A Study on Local Government Characteristics, Infrastructure, and Financial Condition

“…The performance of budget is assessed based on efficiency, effectivity, and economic side, thus, if government report a budget surplus, the government has to fulfil the performance economically, but not necessarily has a good budget performance assessed from the aspect of effectivity and efficiency. The result of this study is in line with the study conducted by Cohen (2008) and Jones and Walker (2007). Previous study such as Cohen et al (2012) provide evidence that financial performance is important factor to predict financial distress.…”

“…A large number of populations in a certain area will increase the demand to the government to provide better public services. Cohen (2008) obtains evidence that the number of population has an effect on the financial performance of local government. The larger the number of population is, the higher the demand for good public services is.…”

“…Plummer et al (2007) in their study employ performance government wealth ratio or a ratio for performance from the budget and ratio of government performance from equity (performance fund ratio). Cohen (2008) in his study employs return on equity (ROE), return on asset (ROA), and profit margin to assess performance. Jones and Walker (2007) assess government performance ratio using ROA and net income (surplus).…”

“…Jones and Walker (2007) assess government performance ratio using ROA and net income (surplus). This study employs performance government wealth ratio (Plummer et al, 2007), ROA, and profit margin (Cohen, 2008) to assess local government performance. Cohen et al (2012) also provide evidence that financial performance is important indicators on the financial distress of local government.…”

“…Groves et al (1981)) employs debt structure and unfunded liabilities to assess government abilities to repay their debts. Cohen (2008) employs current ratio, debt to equity ratio, and long term liabilities to total assets to predict local government performance.…”