Why do Cities Hoard Cash? Determinants and Implications of Municipal Cash Holdings

41 Pages Posted: 6 Jul 2006 Last revised: 17 Jun 2008

See all articles by Angela K. Gore

Angela K. Gore

George Washington University - School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: February 2008

Abstract

This paper examines the determinants of municipal cash holdings and the implications of holding high levels of cash. The first part of the analysis investigates municipal manager incentives to accumulate cash as part of normal operations. Results indicate that municipalities with a higher variation in revenues, fewer sources of revenues, and higher growth accumulate more cash. Larger governments and those receiving relatively more state revenue accumulate less cash.

Further analysis considers whether high levels of cash indicate agency problems, and finds municipalities with high cash holdings spend more on administrative expenses, city manager salaries, and bonuses. I find no evidence that municipalities with excess cash return it to citizens by reducing taxes. The presence of staggered councils and councils that are not independent tend to exacerbate excessive cash holdings. These results are consistent with the proposition that governments with high cash levels have agency problems relative to those with lower cash holdings.

Keywords: municipal, local governments, cities, excess cash, governance, efficiency

JEL Classification: M41, M48, G34, H72

Suggested Citation

Gore, Angela K., Why do Cities Hoard Cash? Determinants and Implications of Municipal Cash Holdings (February 2008). Available at SSRN: https://ssrn.com/abstract=913425 or http://dx.doi.org/10.2139/ssrn.913425

Angela K. Gore (Contact Author)

George Washington University - School of Business ( email )

2201 G St NW
Washington, DC 20052
United States
(202) 994-6195 (Phone)

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