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Local Government Risk Assessment: The Effect of Government Type on Credit Rating Decisions in Texas
Author(s) -
Greer Robert A.
Publication year - 2016
Publication title -
public budgeting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.694
H-Index - 30
eISSN - 1540-5850
pISSN - 0275-1100
DOI - 10.1111/pbaf.12082
Subject(s) - credit rating , bond credit rating , revenue , local government , credit enhancement , credit reference , agency (philosophy) , credit history , business , debt , actuarial science , government (linguistics) , ordered probit , finance , economics , credit risk , public economics , econometrics , philosophy , linguistics , public administration , epistemology , political science
In consideration of increased levels of debt issued by special purpose local governments, this study explores the relationship between local government type and credit rating decisions. Investors use credit ratings as a signal for default risk, and risk level is a function of local economic base including service responsibilities and revenue sources. Governmental functions and economic bases vary across local government types which affect credit rating decisions. Specifically, special purpose governments have more limited responsibilities and revenue sources compared to general purpose governments. To model the decision of agency selection a multivariate probit model is estimated using bond deals from six different types of local governments in Texas. Findings suggest differences among general purpose and special purpose local governments. This supports the hypothesis that economic base affects credit rating decisions. Results indicate that credit rating agencies evaluate and weight information differently, and that local governments chose rating agencies in response.