Capital Structure and Performance Implications of Special-Purpose Governments

32 Pages Posted: 13 Nov 2019 Last revised: 7 Aug 2020

See all articles by Judith Hermis

Judith Hermis

Naval Postgraduate School

Robert Eger

Government of the United States of America - Graduate School of Business and Public Policy

Date Written: August 3, 2020

Abstract

Do special-purpose governments (SPGs) mimic the capital structure of private firms, when SPGs lack the market mechanism for discipline to which private-sector entities are subject? If so, what implications do those choices have on SPG performance? This paper answers these questions. SPGs are local, quasi-governmental entities established by state legislatures who have the operating flexibility of private corporations. In the United States, there are over 50,000 special-purpose governments with outstanding (and off balance-sheet) debt totaling one trillion dollars. Despite their contribution to national fiscal health, SPGs remain relatively underexplored. Using a sample of transportation SPGs over 20 years, we find that SPGs follow Myers’ and Majluf’s pecking-order theory of capital structure. Additionally, we find that increases in SPGs’ debt predicts increases in revenues and decreases in cash flows. These results help illuminate a poorly understood branch of America’s public sector.

Keywords: Financial management, capital structure, special purpose entities, fiscal federalism

JEL Classification: H77, H83, L91

Suggested Citation

Hermis, Judith and Eger, Robert, Capital Structure and Performance Implications of Special-Purpose Governments (August 3, 2020). Available at SSRN: https://ssrn.com/abstract=3480075 or http://dx.doi.org/10.2139/ssrn.3480075

Judith Hermis (Contact Author)

Naval Postgraduate School ( email )

555 Dyer Road
Monterey, CA 93943
United States

Robert Eger

Government of the United States of America - Graduate School of Business and Public Policy ( email )

555 Dyer Road
Monterey, CA 93943
United States
831-656-7625 (Phone)

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