An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Angela K. Gore
University of Oregon

Abstract: My paper examines the determinants of municipal cash holdings and agency implications of holding high levels of cash. The first part of my paper empirically examines municipal managers' incentives to accumulate cash as part of normal operations. My results indicate that municipalities with a higher variation in revenues, fewer sources of revenues, and higher growth accumulate more cash.

In further analysis, I examine whether very high levels of cash are associated with agency problems, and find that those with high cash holdings spend more on administrative expenses, city manager salaries, and bonuses. I find no evidence that municipalities with excess cash effectively return it to citizens by reducing taxes. The presence of staggered councils and councils that are not independent tend to exacerbate excessive cash holdings. Overall, I conclude that governments with high cash levels appear to have agency problems relative to those with lower cash holdings.

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