A Replication Study of “Why Do Cities Hoard Cash?” (The Accounting Review 2009)

Source: Michael L. Hand, Kawika Pierson, Fred Thompson, Public Finance Review, Vol. 44 no. 5, September 2016
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From the abstract:
Gore’s article explores the determinants and implications of cash reserves. Here, we replicate Gore’s finding of a positive relationship between environmental uncertainty and municipal fund balances using the same data, the same specifications, and the same econometric software. We also test the robustness of her original findings by adding years and observations. We show that the empirical results reported in Gore’s article are largely replicable and that its results are robust to substantial data extensions. Nevertheless, we believe that Gore reaches normative conclusions that municipalities hold “excess cash reserves,” which are not justified by her empirical results.
Why do Cities Hoard Cash? Determinants and Implications of Municipal Cash Holdings
Angela K. Gore, George Washington University – School of Business, February 2008

From the 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.