Financial sustainability in local governments is a fundamental condition to the effective, efficient and economical delivery of public services. Failure to achieve this prerequisite would undermine the governments’ capability to cope with current and future obligations to secure public services delivery (Honadle et al., 2004; Wällstedt et al., 2014). During the last 20 years, a significant process of corporatization as new pattern of local public services delivery has took place internationally (Grossi and Reichard, 2008; Bel and Fageda, 2006). However, more recently, concerns raised about excessive proliferation of subsidiaries, especially considering the austerity policies often imposed as a response to the economic crisis, corruption, mismanagement, and growing financial distress situations that involved many national and local governments (Cuadrado-Ballesteros et al., 2013).
After outlining the drivers of the corporatization trends and its pros and cons under the institutional theory perspectives (Powell and DiMaggio, 1991), the purpose of this paper is to verify if the financial sustainability of local governments is affected by the performance of municipal corporations – in terms of profitability, leverage, liquidity – and by the organizational structure of the corporate group – in terms of size of decentralized activities.
Using a sample of 145 Italian’s municipalities and their 409 controlled companies, for the period 2012-2013 we test our hypothesis trough a multivariate analysis based on Tobit model by implementing the Garcia-Sanchez et al. 2012 “FH index” as a proxy for financial sustainability.
Our results show that financial sustainability of local governments is positively associated with high size and low leverage of the controlled entities and with the existence of a political pressure. Moreover, the fragmentation of the corporate group structure is negatively associated with the financial health of local governments when corporations are of small size.
Keywords: Municipal Corporations; Financial Sustainability; Institutional Theory; Italy
References:
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