Risk assessment of the local government sector based on the ratio analysis and the DEA method. Evidence from Poland

Krzysztof Kluza ()
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Krzysztof Kluza: Warsaw School of Economics (SGH)

Eurasian Economic Review, 2017, vol. 7, issue 3, No 2, 329-351

Abstract: Abstract The local government (LG) sector plays an important role in the EU economies. Besides providing a vast range of public services, it accounts for over 8% of total investment. The crisis, which started in 2008, resulted in increased LG indebtedness and raised concerns over the sector’s debt repayment capacity. This paper proposes an alternative methodology of risk assessment of LGs to statutory debt limits, the Altman model and non-financial indicators. Firstly, it employs a corporate finance approach to evaluate the financial standing of individual entities. The measures are based on free operating cash flow and net debt. Next, Data Envelopment Analysis is used to derive the relative performance of LGs in debt utilization. The indicators used are available from the LG financial reports and also allow risk to be monitored on a quarterly basis. The proposed approach allows the ranking of the risk of individual LGs according to both their debt service capacity and long-term ability to manage costs and carry out a rational investment policy. The results obtained using the DEA method also enable the identification of LGs with persistently inferior risk profile. The quantitative analysis is conducted for the local governments in Poland for the period 2008–2015.

Keywords: Local governments; Risk assessment; Unsystematic risk; DEA method (search for similar items in EconPapers)
JEL-codes: C15 D81 H72 H74 R50 (search for similar items in EconPapers)
Date: 2017
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Citations: View citations in EconPapers (3)

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DOI: 10.1007/s40822-017-0075-z

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