Financial Accountability & Management, 24(3), August 2008, 0267-4424

IDENTIFYING THE MODERATOR FACTORS OF

FINANCIAL PERFORMANCE IN GREEK MUNICIPALITIES
SANDRA COHEN

INTRODUCTION

In Greece accrual basis accounting was introduced to several public sector

entities following the example of numerous countries in Europe and worldwide
from 1998 onwards. The related accounting reform process has undoubtedly
been slow and has encountered several implementation problems (Venieris
and Cohen, 2004). Municipalities have proven to be the only sector where
considerable progress has been made towards this aim albeit a considerable
period of stagnation (Cohen et al., 2007). Literature provides several examples
of analogous accounting changes in the context of local governments (see for
example Montesinos and Vela, 2000; Christiaens, 1999 and 2001; Brorstrom,
1998; and IPSASB, 2006).
The accounting change took place during a period where the assessment of
local government performance had become a major issue since municipalities
take on increasingly more responsibility in terms of providing essential services
to taxpayers. The increasing decentralization in decision-making from central
government to local government has made the measurement and evaluation of
their performance critical. As in analogous cases, the increasing requirements
for accountability in the public sector in terms of performance and results constituted the prime driver of the development of an evaluation system (Sanderson,
2001). However, whether private sector notions of performance measurement
and accountability are applicable to the public sector is questionable (Ittner and
Larcker, 1998).
Undoubtedly, the assessment exercise in Greek municipalities was not likely
to take place efficiently under the cash basis regime, as significant components
of the financial status of municipalities, such as assets and liabilities, were not
apparent. Thus, the introduction of accrual based accounting and the subsequent

The author is from the Athens University of Economics and Business. She would like
to thank the two anonymous referees, the participants at the 2006 EIASM International
Conference on Accounting, Auditing and Management in Public Sector Reforms in Siena
and the participants at the 5th Annual Conference of the Hellenic Finance and Accounting
Association in Thessalonica for their helpful remarks on an earlier version of the paper.
Address for correspondence: Sandra Cohen, Lecturer of Accounting, Athens University of
Economics and Business, Department of Accounting and Finance, 76 Patission Street, Athens
104-34, Greece.
e-mail: scohen@aueb.gr

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publication of accrual based general purpose financial statements initiated

a period where comprehensive financial performance analysis was at least
feasible. Along these lines, financial statements were proclaimed as a significant
accountability medium by the Ministry of Interior Public Administration and
Decentralization (MIPAD), that is the oversight body of municipalities, in the
new Municipal and Communal Code issued in 2006 (Law 3463/2006).
More specifically, the Municipal and Communal Code of 2006 in several
instances mentioned that the financial performance assessment of municipalities
would be materialized via financial ratio analysis that is a widespread and
accepted in the private sector tool. As van Dooren (2005) mentions, performance
measurement is a fuzzy concept with different people adhering substantially
different meaning to it. A working definition of financial performance assessment
that corresponds to MIPAD s intentions would be the analysis of a municipalitys
ability to meet its financial obligations and to satisfy its service obligations to its
citizens both currently and in the foreseeable future.
The output of this assessment exercise could then be used for benchmarking,
target setting, identification of best practices and ultimately direction of
subsidies and grants on the basis of rational and justified arguments. The use of
accounting information within this context would be aligned with the initial goals
of accrual accounting introduction communicated by MIPAD (MIPAD, 1999 and
2000).
However, the evaluation of public sector entities financial condition and
performance is not as straightforward as in the private sector. On the contrary,
it is a multifaceted task as it involves judgments about the interplay of complex
social, organizational and financial factors. Every municipality operates in a given
environment where financial attractiveness and growth opportunities are highly
dictated by exogenous parameters. Some regions are more or less privileged
than others due to their geographical location, the developed business activity
in the area or their political significance. Common sense would argue that the
above-mentioned parameters are expected to influence population and wealth,
which in turn affect underlying financial measures such as revenues, expenses,
assets and liabilities and ultimately the values of financial ratios. On the other
hand, a private company is flexible enough to freely choose business orientation,
target group, product mix and location. Thus, the existence of such a plethora
of degrees of freedom justifies the applicability of a set of commonly employed
ratios in the private sector in order to compare it against other companies in the
same sector and conclude about its efficiency.
The scope of this paper is to test whether commonly used financial ratios
calculated on the basis of general purpose yearly financial statements are proper
benchmarks for comparisons among municipalities in order to assess their
financial structure and performance. The selection of these financial ratios
is mainly based on both private sector and public sector literature (ICMA,
2003; Berne, 1992; Anthony and Young, 2003; and Finkler, 2005). We try to
assess whether the values of profitability, liquidity, solvency and activity ratios

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are systematically and statistically significantly influenced by factors that are

exogenous to municipalities control and relate mainly to the economic profile of
the territory (such as the municipalitys GDP, the location of the municipality,
the number of inhabitants, the regional price level of real estate, etc). In case our
hypotheses are verified, the use of financial ratios for assessment purposes, as
well as for cross sectional comparisons, should be made with caution and include
municipalities that exhibit similarities in terms of their socio-economic profile.
This paper is important for several reasons. First, it analyses the financial
statements of a large number of municipalities, which is unusual for public
sector surveys, probably due to the lack of readily accessible financial reports
data. The inclusion of a large number of local governments in the sample
adequately approximates to the characteristics of the total population. Second,
it analyses the information content of financial statements throughout time
(i.e., for three financial years) and thus our conclusions are not restricted to
only one-year data. Finally, the results may assist policy makers in designing
performance measurement mechanisms for their supervised organizations that
not only borrow but also extend and adapt private sector practices to the
public sector context. Towards this aim, recommendations regarding additional
information that should accompany financial statements are presented.
The paper is structured as follows. The next section presents the literature
review. The following (third) section describes the research methodology. The
results of the statistical analysis are presented in section four. Finally, the fifth
section summarizes the basic conclusions drawn from the research.

LITERATURE REVIEW

Accrual Accounting Accountability Role

When analysing the drivers of accrual accounting implementation in the public
sector in a global context, empirical evidence advocates that it could provide
a more accurate measurement and communication of public sector entities
financial position (Chan, 2003; and Guthrie, 1998) and performance (Goldman
and Brashares, 1991; Hodges and Mellet, 2003; and Hoque and Moll, 2001),
improve accountability (Gillibrand and Hilton, 1998; Perrin, 1998; and Ryan,
1998) and transparency (van der Hoek, 2005; and Yamamoto, 1999) and
encourage ongoing monitoring of assets (Hodges and Mellet, 2003; and Pallot,
2001). Also, the use of accrual accounting helps the promotion of the notion of
best practice (Brorstrom, 1998) and addresses the need for comparisons among
agencies or with private sector organizations (Pallot, 1997; and Yamamoto,
1999).
It goes without saying that the above parameters strongly advocate the
applicability of accrual accounting for a spherical assessment of financial

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performance and accountability enhancement. Even though the implementation

of accrual accounting in the public sector is not a panacea and its application
in practice encountered several problems (see for example, Brusca Alijarde,
1997; Christiaens, 2001; Hepworth, 2003; and Pendlebury and Karbhari, 1998),
it permitted the confrontation of significant shortcomings that stem from cash
accounting in relation to the depiction of capital assets and the recognition of
revenues and expenses.
The Greek government had set quite ambitious objectives when the accounting reform project in public sector entities and municipalities was launched, such
as: increase of efficiency and effectiveness of public administration, objective
assessment of the degree of efficient use of the resources allocated (Ministry of
Finance, 1997, p. 71), reduction of public expenditure (Ministry of Finance, 1997,
p. 71; and MIPAD, 1999), preparation of more realistic budgets, depiction of the
true financial state of municipalities and ultimately enhancement of control
and transparency (MIPAD, 1999 and 2000). Thus, Greek Government following
the international paradigm has adopted the typical accounting initiatives
encountered in New Public Management (NPM) attempts (e.g., Guthrie, 1998;
Hoque and Moll, 2001; Ryan, 1998; and van der Hoek, 2005).
The Law that enforced the compulsory adoption of accrual accounting by
Greek Municipalities is Presidential Decree 315/99 issued in 1999. The financial
statements that municipalities have to produce and publish on an accrual
accounting basis according to PD 315/99 are the Balance Sheet, the Profit and
Loss Account and the Statement of Income Distribution. The above statements
are accompanied by the Auditors Report. The Auditors Report indicates that
the audit has been conducted in accordance with PD 315/99 and includes an
opinion as to whether the financial statements comply with PD 315/99, subject
to the remarks indicated in the report. They also present and quantify the effect
of any deviations from the accounting principles embedded in the Law.
These financial statements share the characteristics of an accountability
medium that can be analyzed and assessed by any interested user. Even though
from a normative perspective the group of interested users incorporate heterogeneous shareholders (Anthony, 1978; and IFAC, 2007, p. 31) empirical research
has provided evidence that both the actual users (Butterworth et al. 1989; Coy
et al., 1997; and Jones, 1992) and the use of accounting information is rather
limited (Priest et al., 1999; Brusca Alijarde, 1997; and Jones and Pendlebury,
1996). Nonetheless, the upper levels of government and the supervising agencies
are included in a generally accepted definition of users of local government
reporting (Steccolini, 2004; and Brusca and Montesinos, 2006). This is definitely
true for Greek municipalities where oversight authorities, acting consistently
with this generally accepted notion, have included in the recent communal
legislation their intention to exploit the information content of the published
accrual financial statements for performance assessment and subsequent
decision-making.


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Financial Ratio Analysis

Financial ratios are used for all kinds of purposes, including the statutory
regulation of an entitys performance (Barnes, 1987). The use of ratio analysis is
a common tool for comparative assessment of companies in the private sector.
Financial ratios are also used to evaluate the trend of accounting numbers for
the same entity over time. Literature offers a vast combination of balance sheet
and profit and loss account items that can be used for financial ratios calculation.
Furthermore, ratio analysis has not been limited to private sector companies
only. The comprehension of published financial statements by means of ratios
has been proposed for the public sector as well (Anthony and Young, 2003; and
Wilson and Katellus, 2004). According to Fischer et al. (2004), US Department
of Education (DOE), bond rating agencies, foundations and major donors
that provide lending and other resource-related decisions based on non-profits
financial condition extensively employ financial statement ratio analysis for
colleges and universities. The analysis of Brusca Alijarde (1997) revealed that
local entities mainly use the financial ratios that exist in the business entities
and adapt them to their needs. Also, Moodys has developed a model based
on ratios to assess the financial position of public sector entities in the US,
and municipalities in particular.1 Finally, several financial ratios that among
others exploit financial information extracted from fund accounting financial
statements have been proposed by Berne (1992) and ICMA (2003) in order to
assess the financial condition and financial performance of US municipalities.
However, unlike the rather straightforward evaluation of financial performance of a business entity based on the analysis of its profitability by means
of well-understood financial ratios, evaluation of public sector entities financial
condition involves judgments about the interplay of complex social, organizational and financial factors. One basic category of such crucial parameters is
the status of the community in terms of needs and resources. More specifically,
this category consists of determining factors of demand for services such as
population demographics, median age, percentage of households below the
poverty level as well as capacity to provide services, such as personal per capita
income, property values, employment, types of business activity, etc. In general
terms, economy, geography and demographics constitute major components
of a municipality financial condition as they are determining factors of a
governments ability to meet its financial and service obligations.
Thus, as the characteristics of the community are expected to have an impact
on the activity of local governments, the use of macro-economic type parameters
as moderator factors when assessing the performance of public sector entities is
a commonly employed feature in public sector efficiency studies (De Borger and
Kerstens, 1996; Balaguer-Coll et al., 2002; and Athanassopoulos and Triantis,
1998). Athanasopoulos and Triantis (1998) have analyzed the efficiency of 172
large Greek municipalities for the year 1996 on the basis of cash accounting data.
They concluded that the most efficient municipalities were those that had higher

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tax bases, income levels and public investment share on total expenditures. They
also found that inefficiency was related to high shares of grants in total municipal
expenditures and population density. Moreover, Afonso et al. (2006) found that
the expenditure efficiency of the public sector at a country level is related to
non-discretionary factors.
The comparison of ratios among public entities to establish benchmarks is also
a useful outcome of the ratio analysis exercise. Nevertheless, only a few variables
in public sector finance have an absolute benchmark (Berne, 1992). As Chaney
et al. (2002) point out, benchmarking requires an appropriate comparison group,
like one that has similarities in size, geographic location, demographics, revenues
sources or services provided. Thus, as comparisons among local governments are
difficult, differences in demographics and local conditions should be incorporated
in the analysis (Finkler, 2005).
Finally, the values of financial ratios per se are influenced by the accounting principles that govern the preparation of accrual accounting financial
statements. Literature offers several instances where issues that relate to the
recognition and valuation of assets and the calculation of depreciation expenses
have provoked considerable debate (see, for example, Carnegie and West, 2003;
Christiaens and de Wielemaker, 2003; Gillibrand and Hilton, 1998; Heald and
Georgiou, 1995; Hepworth, 2003; Jones and Puglisi, 1997; McCrae and Aiken,
2000; Pallot, 1997 and 2001; and Perrin, 1998). However, in our case the adopted
accounting principles do not influence the cross-sectional analysis, as the same
rules apply without exception to all municipalities (PD 315/99) and the discretion
that can be exercised is extremely limited.

METHODOLOGY

Study Setting
In Greece there are 901 municipalities that are grouped in 52 prefectures
(counties) and 13 regions. The number of municipalities is large in relation to the
size (132,270 km2 ) and the population of the country (approximately 11 million
inhabitants). Also, there is significant variability in terms of their characteristics
such as population, geographical size, dependency on central government, etc.
Municipalities in Greece are responsible for a limited range of functions
when compared to other countries. The main activities of municipalities are
restricted to the provision of basic community services such as the development
and maintenance of local parks, the local registry, street lightening and cleaning,
refuse collection, provision of recreational services, roads maintenance and
repairing and limited transportation and health care services. The Greek
municipalities do not provide schooling and fire services.
Municipalities have their own budgets and follow budgeting principles and
rules that are common to all those entities binding the national government

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budget. They are also subject to several control mechanisms that limit mainly
expenditure choices. According to the Municipal and Communal Code, local
government expenditures are distinguished into mandatory and discretionary.
The first category is unavoidable. Wages and salaries, rents and debt charges
fall within this category. On the other hand, they have discretionary powers
over a range of expenditures. In recent years, municipalities have been given
more autonomy in levying taxes and determining fees for services but they
have in parallel experienced a significant reduction of subsidies and grants from
central Government. Municipalities are subsidised by Central Government for
the conduction of investments and for operating expenses coverage. Except for
the grants that are given to municipalities for the service of specific purposes,
the main amount of subsidies distributed to them is decided on a yearly basis by
the Ministry of Finance and MIPAD on an ad hoc basis. The later allocation aims
at smoothing out geographical and financial inequalities (Ministry of Finance,
2007, p. 146).
The compulsory adoption of accrual accounting since 1 January, 2000, was
restricted to municipalities that satisfied certain criteria (i.e., more than 5,000
citizens or revenues more than approximately 1.5 million euros). All other
municipalities could adopt accrual accounting optionally. After a considerable
delay, the majority of municipalities complied with the Law. According to data
published by the Hellenic Agency for Local Development and Local Government
(EETAA) in October 2005, 64% of the municipalities obliged to adopt accrual
accounting had published financial statements for the year 2003 (EETAA,
2005).

Ratio Selection
The goal of this study is to assess whether factors that are exogenous to the
municipalities control affect the values of the accrual accounting financial ratios
that can be used for financial performance assessment as well as for cross
sectional comparisons in analogy to the private sector paradigm. In other words,
we try to analyse if there is a systematic persistent effect of macro-economic
factors on financial ratios that could induce cross-sectional bias when comparing
heterogeneous municipalities that presumably operate in the same sector.
We selected for the purpose of our analysis a set of nine commonly used
financial ratios. Ratio selection is not a trivial matter but a rather contentious
one because information overlaps individual ratios (Barnes, 1987). This selection
aimed at portraying the financial condition and financial performance of
municipalities. Financial condition varies across a complex continuum with
very few local governments falling at either extreme and thus it could be
considered as a composite of factors and not a simple one-dimensional measure of
performance. As a result, ratio analysis consists of the measurement of different
factors, and consequently, permits the assessment of municipalities strengths
and weaknesses rather than a single assessment. It also involves comparisons, but

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in order for comparisons to be insightful they should be made only among similar
entities. In any case, in order to use ratios for performance assessment purposes,
reference points should also be developed. Moreover, these reference points
instead of being uniform across all type of municipalities should be properly
adjusted to reflect their idiosyncratic characteristics.
The selection of the financial ratios is based on both private sector and
public sector literature (ICMA, 2003; Berne, 1992; Anthony and Young, 2003;
and Finkler, 2005). It also lies among the lines used by the Ministry of
Finance to monitor at an aggregate level and extract statistical information for
the performance of public sector entities in years 19942000 under the cash
accounting regime (Ministry of Finance, 2002, pp. 8493; and Venieris and
Cohen, 2004). Additionally, it aimed at achieving a balanced representation
of the four broad categories of financial ratios, namely profitability ratios,
liquidity ratios, capital structure ratios and performance ratios within the
analysis framework.
The ratio name abbreviations as well as the way they are calculated are
presented in Table 1. The information content of the selected ratios is discussed
hereon.

Profitability Ratios
We use three profitability ratios in our analysis: the Return on Equity ratio
(ROE), the Return on Assets ratio (ROA) and the Profit Margin Ratio (PR). Even
though profitability is not a primary goal in the public sector the existence of a
reasonable surplus is necessary in order for a municipality to have enough funds
to finance its long-term capital investments. Alternatively, municipalities could
avoid the need for surpluses by relying exclusively on long-term debt. However,
this course of action is not an adequate approach and would influence their
solvency. Thus, profitability ratios provide a reflection of the efficiency in the use
of resources and the ability of management to finance growth. Contrary to the
expectations in the private sector, a small positive value for profitability ratios
could be considered as a favourable outcome. Large negative values, especially
when persistent, are indications of significant unfavourable financial prospects.

Liquidity Ratios
Liquidity defined as current assets to current liabilities (Current Ratio CR)
is an indicator of the municipalitys ability to pay its short-term obligations. A
low ratio may result in cash-flow problems that would require greater use of
short term borrowing to cover expenses. The liquidity indicator is informative of
the local governments ability to sustain a strong financial position. A liquidity
ratio of less than one hints at a relative poor liquidity (ICMA, 2003). Anthony
and Young (2003) argue that a value of around two usually corresponds to an
appropriate level. Thus, very low and very high values of the current ratio are
indicative of financial operating problems.

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D/E
LA
AT

Debt/equity

Long term liabilities/Total assets

Assets turnover

OR/OE

CR

Current ratio

Operating revenues/Operating expenses

PR

Profit margin

OR/TR

ROA

Return on assets

Operating revenues /Total revenues

ROE

Ratio Name Abbreviation

Return on equity

Ratio Name

Ratio Calculation
ROE =

Net Surplus (Deficit)

Equity
Net Surplus (Deficit)
ROA =
Total Assets
Net Surplus (Deficit)
PR =
Total Operating Revenues
Current Assets
CR =
Current Liabilities
Total Liabilities
D/E =
Equity
Long Term Liabilities
LA =
Total Assets
Sales Revenues
AT =
Total Assets
Total Operating Revenues Subsidies
OR/TR =
Total Revenues
Total Operating Revenues Subsidies
OR/OE =
Operating Expenses

Ratio Calculation

Table 1

(9)

(8)

(7)

(6)

(5)

(4)

(3)

(2)

(1)

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Capital Structure Ratios

In this category we have included two ratios: the Debt to Equity ratio (D/E) and
the Long Term Liabilities to Total Assets ratio (LA). Both ratios are indicative
of the way a municipality has financed its assets in the long run. According to
Finkler (2005) a D/E value of one or less is a favourable indicator. The higher
the value of the D/E ratio the greater the municipalitys leverage and thus the
greater the extent to which it utilizes debt funds to supplement internal equity
funds. The second ratio relates to the distinction between short and long-term
liabilities. The justified level of leverage is highly related to the cash generating
activity of a municipality. High levels of leverage cast doubts in relation to its
ability to incur debt at reasonable rate terms. Also, they adversely affect its
solvency. Thus, neither very low nor very high values of these ratios are indicative
of a sound financial condition.

Performance Ratios
In this final category we included the Assets Turnover ratio (AT) and two
ratios that are usually encountered in cash accounting regimes that interrelate
revenues and expenses, i.e., the Operating Revenues to Total Revenues ratio
(OR/TR) and the Operating Revenues to Operating Expenses ratio (OR/OE).
The Assets Turnover ratio permits the assessment of the efficient use of assets
within a municipality. Even though high rates of this ratio usually convey
favourable indications, its value can be influenced by the postponement of
investments that would increase the value of the denominator. The other two
ratios are frequently used for performance assessment under the cash basis and
thus it is highly probable that their use would continue despite the accounting
basis change. The higher the value of the OR/TR, the greater the municipalitys
independence from the State Budget, whereas, a low value is indicative of the
opposite. The higher the value of the OR/OE ratio the more sound financial
position characterizes a municipality. Moreover, as the aforementioned two
values are calculated on the basis of accrued revenues and expenses they
constitute proper indicators of the actual financial resources attained and used
during a yearly period. On the contrary, when they were used under the basis of
cash accounting they suffered from the inherent accuracy limitations in resources
measurement of the cash method.

Macro-Economic Factors Selection

The social and economic environment in which a municipality is situated
undoubtedly influences its financial condition and performance. A municipality is
obliged to offer at least a minimum set of services without the privilege of choice.
On the contrary, a private sector company has enough flexibility to adapt and
seize market opportunities. As a consequence, the financial performance of a

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private sector company is usually assessed against the industry norms on the
basis of financial ratios analysis albeit not without limitations. However, this is
not appropriate for local governments. The financial attractiveness of an area
and its growth opportunities that may stem from its geographical location, its
vicinity to resources, its political significance, etc. are expected to affect both
the number of inhabitants and its wealth. The last two variables are in turn
expected to influence underlying financial measures such as revenues, expenses,
assets and liabilities and ultimately the values of financial ratios.
Thus, in the context of ratio analysis we try to quantify the degree to which
factors that are exogenous to the municipalities control, such as their wealth
and size, influence their financial condition and performance. We use three
factors as a proxy of wealth: the gross domestic product (GDP), the real estate
values (PRICE) and the tourist activity (TOURIST) of the municipalities. The
gross domestic product is used as a proxy of the personal income level in the
municipality. The real estate values provide an indication of the citizens capacity
to pay taxes as they mirror the property tax base. Taxes are the primary source
of municipality revenues. The inclusion of the tourist activity as an independent
variable reflects an idiosyncratic factor of the economic environment in Greece.
In several areas the tourist industry is the main locomotive of local economic
activity. This is true mainly for the numerous Greek islands and rural areas that
have a close proximity to the sea or constitute winter resorts.
The size of the municipalities is measured by two variables: the population
(POP) of the municipality and whether the capital of the prefecture (CAPITAL)
is located in the municipality. Population is the most commonly used proxy for a
local governments size. However, as prefecture capital is usually the larger city
of a prefecture and the place where public administration services are gathered,
this variable was also included as an additional size variable.
The five above-mentioned selected independent variables additionally satisfy
two criteria. The first one is that this type of information is retrievable by
secondary sources and it is periodically updated. The second is that these
variables are straightforward, objective and easy to understand by both oversight
agencies and assessed municipalities.

Influence of Wealth
The economic health of a municipality is to a large extent dependent on the
income level of its citizens. Personal income is an important measure of citizens
ability to pay taxes. A high level of personal income generally means higher
property, sales and business taxes. Thus, the affluence of a municipality is
expected to be positively related to its capacity to generate revenues. A local
authority with wealthy citizens is able to levy, at least theoretically, higher local
taxes and charge higher prices for the services rendered. This prospect is also
expected to be positively related to its asset turnover; the invested capital would,
ceteris paribus, generate more revenues than in a less affluent place. Moreover,

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such a municipality is assumed to get financial support from financial institutions

more easily than others, as the wealth of the region can be used as an assurance
of the debts reimbursement. Finally, a municipality that is located in a wealthy
region is expected not to rely heavily on government subsidies as it can generate
sufficient revenues from its operating activities in order to cover its operating
costs. Under these conditions a wealthy municipality is more likely to achieve
a reasonable surplus from its operations, even though the attainment of high
levels of surpluses is not necessarily a goal set by management and it is not
socially desirable.

Influence of Size
According to Berne (1992) many social, political, economic and fiscal features
of governments appear to be related to size usually measured in terms of
population. The number of citizens within a municipality undoubtedly influences
the size of the municipality, e.g., number of municipal officers and employees,
volume of services offered, etc. When the size of a municipality increases,
bureaucratic problems become more intense and the execution of operations
and the management of resources may become less efficient. Thus, a large
municipality may experience increased requirements for efficient management
in order to operate properly and meet the service needs of the population
sufficiently. On the other hand, larger municipalities usually have adequate
human and material resources in order to sustain sophisticated systems that are
designed to support efficient decision making in relation to procedure execution
and current assets and short-term liabilities management. Moreover, the size
of a municipality is expected to be positively related to its bargaining power
during negotiations with both government and financial institutions in relation
to subsidies and fund-raising respectively. Finally, larger municipalities with
more capital needs are expected to exhibit long-term debt exposure in order to
finance their investments.

Data Collection
The analysis is based on all published accrual accounting financial statements
of municipalities for the years 2002 to 2004 available until March 2006. The
number of available financial statements is not stable throughout the time period
of the analysis. This is due to several reasons. Firstly, not all municipalities
commenced, as they were obliged, the implementation of accrual accounting on
time (i.e., year 2000). Thus, several municipalities published financial statements
that refer to the year 2003 or even the year 2004 for the first time. Secondly,
some municipalities have only published inaugural financial statements and then
they disregarded their obligation.2 Thirdly, a significant delay between the end
of the accounting period and the publication of the financial statements has
been witnessed. This delay has amounted to, on several occasions even two

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years. The source of the financial statements related data was the Ministry
of Interior Public Administration and Decentralization (MIPAD) where copies
of the financial statements were available.
The sources of information in relation to the macro-economic factors are the
following:
GDP: The Greek National Statistical Office does not keep GDP statistics on
a municipality level. However, such information is available on a prefecture
level. Thus, we used the GDP of the prefecture to which the municipality
belongs as a proxy for municipalitys GDP. Provisional data was available
for years 20022004.
POP: The number of inhabitants per municipality was retrieved from the
Greek National Statistical Office and refers to census 2001.
PRICE: The regional price level of real estate was gathered from different
sources. The main source was the official list issued by the Ministry of
Finance containing the prefixed prices for real estate transactions for
taxation purposes. However, such information was not available for several
municipalities for which the Ministry of Finance has not yet developed such
benchmarks.
TOURIST: The classification of municipalities as tourist is defined by Law,
which characterizes specific areas as tourist zones that enjoy tax and other
privileges.
CAPITAL: The information about the location of the prefecture capital
(e.g., metropolitan municipalities) was retrieved from the MIPAD.

The Model
The following multivariate regression model was used in order to assess the
relation between each financial ratio and macro economic factors.
Financial ratio = a 0 + b 1 log GDP + b 2 log pop + b 3 log price
+ b 4 tourist + b 5 capital + e
where:
Financial ratio is one of the following ratios: Return on equity, Return
on assets, Profit margin, Current ratio, Debt/Equity, Long term liabilities/Total assets, Assets turnover, Operating revenues / Total revenues
and Operating revenues/Operating expenses as defined in Table 1;
Log GDP is the logarithm of the gross domestic product (GDP) of the
municipality;

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Log pop is the logarithm of the population (POP) of the municipality (census
2001);
Log price is the logarithm of the property values (PRICE) in the municipality;
Tourist is a dummy variable taking the value 1 when the municipality has
significant tourist development and 0 otherwise;
Capital is a dummy variable taking the value 1 when the municipality hosts
the capital of the prefecture and 0 otherwise.
As the distribution of GDP, POP and PRICE variables was highly skewed, the
logarithm transformation was used. The transformation resulted in obtaining
satisfactory levels of normality and symmetry in terms of distribution of these
variables.

RESULTS

Table 2 describes the number of municipalities per region and per accounting
period in the sample for which financial statements data were available. The 497
municipality years correspond to 277 physical municipalities.
The statistical analysis was conducted on a yearly basis. In order to avoid
extreme ratio values, we excluded from the analysis all ratios with values that
fell out of 2 std. deviations. Table 3 presents the descriptive statistics of ratios
after the elimination of outliers and the descriptive statistics of independent
variables for the years 20022004.
Table 4 presents the Pearson correlations among the independent variables
for the three-year period. The Pearson correlations per year are qualitatively
the same. All independent variables are statistically significantly correlated but
none of the pairwise correlation coefficients exceeds the conventional threshold
of 0.800 that could cause multicollinearity problems (Gujarati, 1995). Moreover,
the fact that the logGDP and the Tourist variables that are both wealth variables
are negatively correlated indicates that the characteristic of wealth may take
several forms and it is not univocally defined.
The results of the OLS regressions are presented in Table 5 where Panels A to
C refer to the results of the years 2002 to 2004 respectively. The regressions have
been tested for collinearity problems. The rule of thumb is that there is evidence
of multicollinearity problems if the variance inflation factor (VIF) of a variable
exceeds 10 (Gujarati, 1995). The values of VIF of all explanatory variables in all
regressions in Table 5 did not exceed this value.
The results in Table 5 reveal that profitability ratios seem to be influenced
by two macro-economic factors; population and real estate prices. A positive
statistically significant relation at 5% statistical significance level of real estate
prices to all profitability ratios in 2002 and ROE in 2003 is evident. Also, a

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MODERATING FACTORS OF FINANCIAL PERFORMANCE IN MUNICIPALITIES

279

Table 2
Number of Municipalities Year Observations per Fiscal Year and
Region
Regions

2002

2003

2004

Total Number of
Municipality Years
per Region

Total Number
of Municipalities
per Region that have
Published Financial
Statements at Least
for One Year

Kriti
Dytiki Makedonia
Sterea Ellada
Dytiki Ellada
Anat. Makedonia & Thraki
Notio Aigaio
Ipeiros
Thessalia
Kentriki Makedonia
Attiki
Peloponnisos
Ionia Nisia
Voreio Aigaio
Total

1
2
2
3
5
4
3
16
32
31
9
6
0
114

7
6
15
24
10
10
15
36
64
41
15
11
0
254

4
4
15
21
6
9
4
14
27
11
8
6
0
129

12
12
32
48
21
23
22
66
123
83
32
23
0
497

8
6
21
31
10
13
15
38
65
42
17
11
0
277

negative statistically significant relation of population to ROA and ROE ratios

in 2003 is apparent. The intercept is also negative and statistically significant
at least at 5% for all profitability ratios in 2002. No other variables explain
the variation of profitability ratios. Thus, our evidence supports that wealthier
(smaller) municipalities are more likely to perform better than less affluent
(larger) ones in terms of ROA and ROE.
Moreover, the values of all other ratios seem to be explained to a higher or
lower extent by the non-discretionary parameters used in the analysis. More
specifically, the size of the municipality in terms of the number of inhabitants
has a negative effect on liquidity values as measured by the current ratio
of the municipality (p = 0.043 in 2002, p < 0.001 in 2003 and p = 0.038
in 2004). However, as neither very low nor very high liquidity values are
indicators of a sound financial management, the negative sign indicates that
larger municipalities seem to better manage their short term resources given the
statistically significant 1% positive value of the intercept. The capital structure
of the municipality (e.g., debt/equity) is positively related at the 1% statistical
significance level to the population (in 2003 and 2004) and the GDP (in all years).
Also, it has a statistically significant negative relationship with real estate prices
(p = 0.042 in 2002 and p = 0.003 in 2003). The fact that a municipality has tourist

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COHEN

Table 3
Descriptive Statistics for Financial Ratios and Macro-economic Factors
for Years 20022004

Panel A: 2002
ROAa
ROEa
RPa
CRa
D/Ea
ATa
LAa
OR/TRa
OR/OEa
Pop (in thousands)
GDP (in billion )
Real estate (in 00/m2)
Tourist (value = 1)
Capital (value = 1)
Panel B: 2003
ROA
ROE
RP
CR
D/E
AT
LA
OR/TR
OR/OE
Pop (in thousands)
GDP (in billion )
Real estate (in 00/m2)
Tourist (value = 1)
Capital (value = 1)
Panel C: 2004
ROA
ROE
RP
CR
D/E
AT
LA
OR/TR
OR/OE
Pop (in thousands)
GDP (in billion )

Mean

Std.Dev.

Min.

Max.

0.0049
0.0124
0.0658
2.5757
0.1501
0.1232
0.0421
0.5455
0.4754
34.1056
18.8448
8.9989

0.0261
0.0334
0.1500
3.3445
0.1691
0.0908
0.0450
0.1548
0.1649
78.9749
22.5364
7.1927

0.0689
0.0955
0.4964
0.1184
0.0018
0.0105
0.0000
0.1394
0.0994
3.7790
0.6130
2.2000

0.0718
0.0803
0.2460
22.7571
0.7862
0.3513
0.1737
0.8391
0.8222
745.5140
54.5050
44.0205

99
99
104
111
109
104
103
106
103
114
114
111
35
19

0.0047
0.0020
0.0037
3.5129
0.1156
0.1101
0.0336
0.5134
0.4709
20.8488
12.9915
7.3639

0.0262
0.0326
0.1672
4.8379
0.1498
0.0803
0.0413
0.1649
0.1754
54.7211
20.8681
6.2055

0.0689
0.0992
0.4567
0.1096
0.0000
0.0017
0.0000
0.0948
0.0631
0.7480
0.3340
2.2000

0.0818
0.0932
0.4404
46.1100
0.8708
0.3407
0.1864
0.9134
0.8876
745.5140
59.1690
44.0205

240
241
243
249
247
245
240
246
242
254
254
232
69
25

0.0023
0.0067
0.0303
4.5697
0.1080
0.1060
0.0329
0.4824
0.4163
12.6432
8.4655

0.0272
0.0351
0.1382
8.1905
0.1368
0.0789
0.0356
0.1773
0.1713
13.4712
17.6804

0.0787
0.1013
0.4461
0.1308
0.0001
0.0062
0.0000
0.0899
0.0600
1.1680
0.3502

0.0789
0.0978
0.3445
60.3799
0.8096
0.3490
0.1470
0.8638
0.7994
66.0170
64.7040

123
124
120
128
125
126
121
126
124
129
129


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MODERATING FACTORS OF FINANCIAL PERFORMANCE IN MUNICIPALITIES

Table 3 (Continued)

Price (in 00/m2)

Tourist (value = 1)
Capital (value = 1)

Mean

Std.Dev.

Min.

Max.

6.8826

4.8497

2.2000

33.7491

104
35
11

Notes:
a
Ratio definitions are presented in Table 1.
Pop is the population of the municipality (census 2001).
GDP is the gross domestic product of the prefecture as proxy for the GDP for the municipality.
Price is the property values in the municipality.
Tourist is a dummy variable taking the value 1 when the municipality shows significant tourist
development and 0 otherwise.
Capital is a dummy variable taking the value 1 when the municipality hosts the capital of the
prefecture and 0 otherwise.

Table 4
Pearson Correlations Among Independent Variables

Log pop
Log GDP
Log price
Tourist
Capital

Log pop

Log GDP

Log price

Tourist

Capital

1.000
0.418
0.627
0.227
0.480

1.000
0.547
0.186
0.129

1.000
0.270
0.297

1.000
0.466

1.000

Notes:
Log GDP is the logarithm of the gross domestic product of the prefecture as proxy for the GDP for
the municipality.
Log pop is the logarithm of the population of the municipality (census 2001).
Log price is the logarithm of the property values in the municipality.
Tourist is a dummy variable taking the value 1 when the municipality shows significant tourist
development and 0 otherwise.
Capital is a dummy variable taking the value 1 when the municipality hosts the capital of the
prefecture and 0 otherwise.

Correlation is significant at the 0.01 level (2-tailed).

development is also positively related to debt exposure. These findings endorse

that larger and wealthier municipalities tend to borrow more than smaller and
less affluent ones.
The tourist activity of a municipality explains partially the value of asset
turnover ratio in all years (at least p < 0.050). The other two explanatory
variables of assets turnover are population (only for 2003: p = 0.035) and GDP
(p < 0.050 in all years). Thus, municipalities that are active in tourism and are
relatively affluent seem to better manage their assets.
On the other hand, the percentage participation of long-term debt to total
assets is positively related to population (2003: p < 0.001 and 2004: p = 0.077)

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Panel A: 2002
0.021
a0
(0.044)
Log pop
0.003
(0.398)
Log GDP
0.001
(0.852)
Log price
0.029
(0.043)
Tourist
0.012
(0.099)
Capital
0.011
(0.276)
F
2.272
(p-value)
(0.054)
0.063
R2 adj.
N
96

0.033
(0.015)
0.003
(0.519)
0.007
(0.317)
0.040
(0.030)
0.011
(0.234)
0.013
(0.304)
1.922
(0.098)
0.046
96

0.129
(0.029)
0.034
(0.137)
0.009
(0.770)
0.172
(0.033)
0.018
(0.665)
0.006
(0.918)
1.698
(0.143)
0.034
101
3.999
(0.002)
0.984
(0.043)
0.668
(0.320)
1.750
(0.304)
0.450
(0.606)
1.785
(0.140)
2.339
(0.047)
0.059
108

0.062
(0.293)
0.044
(0.059)
0.115
(0.000)
0.166
(0.042)
0.088
(0.036)
0.094
(0.101)
5.645
(0.000)
0.181
106

AT

0.046
(0.156)
0.009
(0.451)
0.063
(0.000)
0.017
(0.699)
0.046
(0.044)
0.000
(0.999)
6.019
(0.000)
0.201
101

Financial ratio = a 0 + b 1 log pop + b 2 log GDP + b 3 log price + b 4 tourist + b 5 capital + e
ROA
ROE
RP
CR
D/E

OLS Estimates of Financial Ratios Models

Table 5

0.023
(0.172)
0.011
(0.098)
0.029
(0.002)
0.048
(0.038)
0.030
(0.013)
0.018
(0.273)
4.165
(0.002)
0.138
100

LA

0.418
(0.000)
0.042
(0.045)
0.072
(0.014)
0.199
(0.008)
0.027
(0.468)
0.062
(0.235)
6.612
(0.000)
0.216
103

OR/TR

0.332
(0.000)
0.022
(0.342)
0.075
(0.021)
0.132
(0.107)
0.074
(0.079)
0.053
(0.355)
5.416
(0.000)
0.182
100

OR/OE

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Journal compilation 

F
(p-value)
R2 adj.
N

Capital

Tourist

Log price

Log GDP

Log pop

Panel B: 2003
a0

0.003
(0.677)
0.005
(0.050)
0.001
(0.724)
0.019
(0.051)
0.004
(0.414)
0.001
(0.904)
1.667
(0.144)
0.015
219

0.001
(0.925)
0.012
(0.000)
0.002
(0.707)
0.042
(0.001)
0.005
(0.368)
0.003
(0.781)
4.098
(0.001)
0.066
220

0.012
(0.773)
0.021
(0.231)
0.001
(0.964)
0.070
(0.271)
0.035
(0.247)
0.025
(0.606)
1.114
(0.354)
0.003
222

5.718
(0.000)
1.683
(0.000)
0.801
(0.256)
3.056
(0.083)
0.870
(0.301)
1.884
(0.170)
3.661
(0.003)
0.056
227

0.018
(0.581)
0.058
(0.000)
0.100
(0.000)
0.147
(0.003)
0.063
(0.008)
0.057
(0.137)
14.604
(0.000)
0.233
225

AT

0.048
(0.007)
0.016
(0.035)
0.048
(0.000)
0.019
(0.489)
0.048
(0.000)
0.033
(0.116)
11.727
(0.000)
0.195
223

Financial ratio = a 0 + b 1 log pop + b 2 log GDP + b 3 log price + b 4 tourist + b 5 capital + e
ROA
ROE
RP
CR
D/E

Table 5 (Continued)

0.008
(0.405)
0.016
(0.000)
0.020
(0.001)
0.036
(0.014)
0.015
(0.029)
0.014
(0.217)
9.207
(0.000)
0.159
218

LA

0.401
(0.000)
0.010
(0.527)
0.085
(0.000)
0.079
(0.162)
0.059
(0.029)
0.060
(0.177)
9.811
(0.000)
0.165
224

OR/TR

0.344
(0.000)
0.002
(0.892)
0.085
(0.001)
0.079
(0.202)
0.061
(0.038)
0.029
(0.550)
8.650
(0.000)
0.149
220

OR/OE

MODERATING FACTORS OF FINANCIAL PERFORMANCE IN MUNICIPALITIES

283

0.003
(0.768)
0.004
(0.408)
0.006
(0.363)
0.016
(0.332)
0.002
(0.752)
0.004
(0.745)
0.768
(0.575)
0.012
99

0.016
(0.223)
0.001
(0.919)
0.002
(0.844)
0.035
(0.101)
0.007
(0.466)
0.013
(0.409)
1.241
(0.296)
0.012
99

0.001
(0.988)
0.009
(0.712)
0.027
(0.444)
0.048
(0.582)
0.003
(0.944)
0.004
(0.956)
0.337
(0.889)
0.036
97
8.077
(0.009)
2.958
(0.038)
2.139
(0.273)
4.657
(0.332)
0.426
(0.838)
2.718
(0.452)
1.772
(0.126)
0.036
103

0.046
(0.310)
0.059
(0.005)
0.088
(0.003)
0.012
(0.865)
0.000
(0.989)
0.076
(0.155)
8.385
(0.000)
0.272
100
0.029
(0.273)
0.016
(0.191)
0.048
(0.006)
0.009
(0.833)
0.053
(0.004)
0.022
(0.482)
6.782
(0.000)
0.224
101

AT
0.001
(0.921)
0.011
(0.077)
0.003
(0.709)
0.006
(0.778)
0.009
(0.332)
0.016
(0.325)
1.964
(0.091)
0.048
97

LA
0.382
(0.000)
0.018
(0.529)
0.088
(0.031)
0.082
(0.407)
0.127
(0.004)
0.023
(0.753)
4.315
(0.001)
0.142
101

OR/TR

0.295
(0.000)
0.006
(0.839)
0.091
(0.020)
0.043
(0.650)
0.103
(0.014)
0.058
(0.419)
4.729
(0.001)
0.160
99

OR/OE

Notes:
Financial ratio is one of the following ratios: Return on equity, Return on assets, Profit margin, Current ratio, Debt/Equity, Long term liabilities/Total assets,
Assets turnover, Operating revenues/Total revenues and Operating revenues/Operating expenses. Ratio definitions are presented in Table 1.
Log GDP is the logarithm of the gross domestic product of the prefecture as proxy for the GDP for the municipality.
Log pop is the logarithm of the population of the municipality (census 2001).
Log price is the logarithm of the property values in the municipality.
Tourist is a dummy variable taking the value 1 when the municipality shows significant tourist development and 0 otherwise.
Capital is a dummy variable taking the value 1 when the municipality hosts the capital of the prefecture and 0 otherwise.
P values are shown in parentheses.
Significant coefficients at 1% or 5% significance level are presented in bold type.

F
(p-value)
R2 adj.
N

Capital

Tourist

Log price

Log GDP

Log pop

Panel C: 2004
a0

Financial ratio = a 0 + b 1 log pop + b 2 log GDP + b 3 log price + b 4 tourist + b 5 capital + e
ROA
ROE
RP
CR
D/E

Table 5(Continued)

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MODERATING FACTORS OF FINANCIAL PERFORMANCE IN MUNICIPALITIES

285

and GDP (2002: p = 0.002 and 2003: p < 0.001) but negatively associated with
property values (2002: p = 0.038 and 2003: p = 0.014). It is also positively related
at the 5% statistical significance level in years 2002 and 2003 to the tourist
development of the municipality. From these findings it can be inferred that
larger and wealthier municipalities tend to borrow more money from financial
institutions compared to smaller and less affluent ones. Another explanation
could be that only the municipalities with the above-mentioned profile (i.e.,
large and wealthy) seek long-term financial support from financial institutions.
Our results are particularly important as far as the OR/TR and OR/OE ratios
are concerned. These two ratios proved to be positively related mainly with GDP
(OR/TR, 2002: p = 0.014, 2003: p < 0.001 and 2004: p = 0.031; OR/OE, 2002:
p = 0.021, 2003: p < 0.001 and 2004: p = 0.020) and property values (OR/TR,
2002: p = 0.008), albeit not during the whole period of analysis. Population is
negatively related to OR/TR only in 2002 at 5% significance level (p = 0.045).
Finally, the development of a municipality in relation to tourism is statistically
positively related at the 5% significance level with the OR/TR ratio (p = 0.029
in 2003 and p = 0.004 in 2004) and the OR/OE ratio for years 2003 and 2004
(p = 0.038 in 2003 and p = 0.014 in 2004). Thus, our data reveal that the
more affluent municipalities rely less on government subsidies and exhibit an
improved operating revenues/operating expenses relationship. These findings
are consistent with our expectations of wealth effect on performance.
The finding that financial ratios are influenced by macro-economic factors was further tested by splitting the initial sample into two groups for
each control variable per year. More specifically, the municipalities that had
published financial statements in any given year (20022004) were split into
two groups on the basis of the median value of the three continuous control
variables: large vs small municipalities (in terms of POP) and wealthier vs
less wealthier municipalities (in terms of GDP and PRICE respectively). The
median values of the independent variables that were used on a yearly basis
for this purpose are different throughout the three-year period. The trend in
the median values is consistent with the Greek accrual accounting adoption
experience where larger and wealthier municipalities were the pioneers in
publishing accrual accounting statements and the smaller and less affluent ones
followed.
As shown in Table 6, the statistically significant differences in the mean values
of the financial ratios under analysis reveal that there are several dissimilarities
among the Greek municipalities that compose a highly heterogeneous mosaic
in terms of wealth and size. More specifically, wealth measured both in terms
of GDP and PRICE proved to be a statistically significant differentiation factor
in the mean values of almost all measured ratios with the exception of the
profitability ratios. The conclusion that can be drawn from Table 6 is that
wealthier and larger municipalities perform better in operating terms; they
borrow more and at the same time they manage their short-term assets and
liabilities more efficiently than their less affluent and smaller counterparts.

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ROA
ROE
RP
CR
D/E
AT
LA
OR/TR
OR/OE

Ratioa

Mean

0.0047
0.103
0.0772
3.390
0.1048
0.1004
0.0327
0.5047
0.4426

Mean

0.0049
0.0142
0.5646
1.857
0.1914
0.1436
0.0508
0.5792
0.5040

Group A
Group B
GDPmedian
GDP<median
GDP
GDP
Panel A: 2002
Median = 3.442 (in billion )

0.0002
0.0038
0.0207
1.532
0.0866
0.0432
0.0180
0.0745
0.613

Diff
0.096
0.565
0.485
0.022
0.006
0.013
0.042
0.013
0.059

Significance
(p-value)

Group B
Pop<median
Pop

0.0028
0.0092
0.0589
2.3512
0.1821
0.1455
0.0492
0.5724
0.5205

Mean
0.0069
0.0153
0.0732
2.796
0.1197
0.1001
0.0352
0.5175
0.4276

Mean

Median = 13.862 (in thousands)

Group A
Popmedian
Pop

0.0041
0.0061
0.0142
0.4448
0.0623
0.0453
0.0140
0.0548
0.0929

Diff
0.432
0.364
0.631
0.486
0.057
0.010
0.114
0.070
0.004

Significance
(p-value)

Group B
Price<median
Price

0.0014
0.0057
0.0312
2.581
0.1611
0.1577
0.0449
0.6040
0.5388

Mean

0.0110
0.0190
0.1058
2.619
0.1444
0.0911
0.0401
0.4910
0.4220

Mean

Median = 7.630 (in 00/m2)

Group A
Pricemedian
Price

Diff
0.0124
0.1329
0.0745
0.0379
0.0167
0.0665
0.0048
0.1130
0.1167

Differences in the Mean Values of Financial Ratios Among Groups for Years 20022004

Table 6

0.019
0.053
0.013
0.954
0.615
0.000
0.600
0.000
0.000

Significance
(p-value)

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Mean

0.0060
0.0028
0.0165
2.7791
0.1470
0.1290
0.0399
0.5695
0.5259

Ratioa

ROA
ROE
RP
CR
D/E
AT
LA
OR/TR
OR/OE

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0.0035
0.0013
0.0093
4.2525
0.0854
0.0918
0.0275
0.4583
0.4186

Mean

Group A
Group B
GDPmedian
GDP<median
GDP
GDP
Panel B: 2003
Median = 2.447 (in billion )

0.0025
0.0015
0.0259
1.4733
0.0615
0.0371
0.0124
0.1111
0.1072

Diff
0.453
0.711
0.227
0.016
0.001
0.000
0.020
0.000
0.000

Significance
(p-value)

Group B
Pop<median
Pop

0.0051
0.0003
0.0066
2.925
0.1541
0.1257
0.0461
0.5443
0.5057

Mean
0.0044
0.0044
0.0141
4.1150
0.0780
0.0944
0.0216
0.4831
0.4373

Mean

Median = 8.613 (in thousands)

Group A
Popmedian
Pop

0.0006
0.0047
0.0207
1.1898
0.0761
0.0313
0.0244
0.0612
0.0684

Diff

Table 6 (Continued)

0.841
0.259
0.334
0.054
0.000
0.002
0.000
0.003
0.002

Significance
(p-value)

Group B
Price<median
Price

0.0055
0.0021
0.0065
2.9996
0.1462
0.1307
0.0426
0.5744
0.5309

Mean

0.0039
0.0017
0.0142
3.6537
0.0915
0.0926
0.0268
0.4604
0.4217

Mean

Median = 5.869 (in 00/m2)

Group A
Pricemedian
Price

0.0015
0.0004
0.0207
0.6540
0.0547
0.0381
0.0157
0.1140
0.1092

Diff

0.657
0.919
0.360
0.208
0.008
0.000
0.006
0.000
0.000

Significance
(p-value)

MODERATING FACTORS OF FINANCIAL PERFORMANCE IN MUNICIPALITIES

287

0.0016
0.0019
0.0204
5.7291
0.0796
0.0927
0.0331
0.4575
0.3910

0.0061
0.0111
0.0399
3.4459
0.1360
0.1196
0.0326
0.5082
0.4424

ROA
ROE
RP
CR
D/E
AT
LA
OR/TR
OR/OE

0.0078
0.0092
0.0195
2.2832
0.0564
0.0269
0.0004
0.0506
0.0513

Diff
0.110
0.143
0.441
0.115
0.021
0.055
0.946
0.109
0.095

Significance
(p-value)

Group B
Pop<median
Pop

0.0000
0.0061
0.0280
2.978
0.1445
0.1208
0.0416
0.5013
0.4478

Mean
0.0046
0.0073
0.0328
6.2116
0.0721
0.0912
0.0245
0.4642
0.3838

Mean

Median = 7.353 (in thousands)

Group A
Popmedian
Pop

0.0046
0.0011
0.0048
3.2332
0.0723
0.0295
0.0171
0.0371
0.0639

Diff

Notes:
a
Ratio definitions are presented in Table 1.
Significant mean differences at 1% or 5% significance level are presented in bold type.
GDP is the the gross domestic product of the prefecture as proxy for the GDP for the municipality.
Pop is the population of the municipality (census 2001).
Price is the property values in the municipality.

Mean

Mean

Ratioa

Group A
Group B
GDPmedian
GDP<median
GDP
GDP
Panel C: 2004
Median = 2.507 (in billion )

Table 6 (Continued)

0.348
0.853
0.851
0.028
0.003
0.035
0.008
0.239
0.038

Significance
(p-value)

Group B
Price<median
Price

0.0027
0.0090
0.0395
3.7920
0.1448
0.1411
0.0391
0.5614
0.4997

Mean

0.0007
0.0010
0.0218
4.8825
0.0785
0.0840
0.0283
0.4446
0.3753

Mean

Median = 5.869 (in 00/m2)

Group A
Pricemedian
Price

0.0020
0.0079
0.0176
1.0905
0.0663
0.0571
0.0108
0.1167
0.1244

Diff

0.713
0.252
0.514
0.493
0.024
0.000
0.131
0.000
0.000

Significance
(p-value)

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289

Table 7
Cluster Composition in Number of Municipalities per Year
Year 2002

Year 2003

Year 2004

59
49
3
111

165
64
3
232

76
17
11
104

Cluster 1
Cluster 2
Cluster 3
Total number of municipalities

Our last test towards assessing the influence of macro- economic factors on
financial ratios was cluster analysis. We conducted hierarchical cluster analysis
by using as grouping variables only the three continuous independent variables
(i.e. LogGDP, Logpop and Logprice). The clustering procedure showed that in
every period the observations could be classified into three clusters. The number
of municipalities per cluster group per year is presented in Table 7.
A thorough analysis of the composition of the second cluster per year
revealed that all municipalities that are classified in this group belong to
only two prefectures; the prefecture of Attiki (where Athens, the capital of
Greece is located) and the prefecture of Thessaloniki (where Thessalonica, the
second larger city of Greece is located). The prefecture of Attiki accounts for
approximately the 38.0% of the countrys GDP (based on 20022004 data) and
the 34.3% of the total population. The prefecture of Thessaloniki generates
approximately the 11% of the GDP in Greece and hosts almost 1 mil. inhabitants.
The first cluster includes municipalities from prefectures all over Greece for all
three periods. The t-test of the differences in the mean values of ratios analysed
revealed, with the exception of profitability ratios, that the municipalities of
the second cluster (e.g., those that belong to the prefectures of Attiki and
Thessaloniki) perform better that those of the first cluster. The t-test statistics
are presented in Table 8. Thus, the location of the municipality and the macroeconomic characteristics of this geographical location are significant parameters
that influence financial performance.

CONCLUSIONS

After some delay in the adoption of accrual accounting by Greek municipalities,

a significant number of them have published accrual accounting financial
statements. These statements are proclaimed to be used as an accountability
medium by supervising governmental bodies (the MIPAD and the Ministry of
Finance). More specifically, according to the new Municipal and Communal Law,
the assessment of municipalities financial performance will be based on a set
of ratios that will use accrual accounting information. Nevertheless, these ratios

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Table 8
Differences in the Mean Values of Financial Ratios Between
Municipalities Clusters for Years 20022004
Cluster 1
Mean

Cluster 2
Mean

Panel A: 2002
ROA
0.0056
ROE
0.0113
RP
0.0749
CR
3.1316
D/E
0.1068
AT
0.0945
LA
0.0347
OR/TR
0.5012
OR/OE
0.4359

0.0043
0.0150
0.0608
1.8947
0.2126
0.1592
0.0545
0.5989
0.5254

0.0013
0.0037
0.0141
1.237
0.1058
0.0647
0.0198
0.0977
0.0895

0.821
0.610
0.652
0.046
0.003
0.001
0.043
0.001
0.005

0.0042
0.0019
0.0024
3.6388
0.0846
0.0946
0.0281
0.4828
0.4367

0.0063
0.0013
0.0056
2.5203
0.2066
0.1562
0.0530
0.5993
0.5680

0.0021
0.0006
0.0032
1.1185
0.1220
0.0616
0.0249
0.1165
0.1313

0.648
0.920
0.892
0.024
0.000
0.000
0.002
0.000
0.000

Panel C: 2004
ROA
0.0025
ROE
0.0055
RP
0.0316
CR
5.1502
D/E
0.0779
AT
0.0996
LA
0.0294
OR/TR
0.4874
OR/OE
0.4155

0.0056
0.0099
0.0453
1.9165
0.2594
0.1694
0.0454
0.5762
0.5199

0.0031
0.0044
0.0137
3.2337
0.1815
0.0698
0.0160
0.0888
0.1044

0.669
0.742
0.706
0.005
0.019
0.002
0.254
0.053
0.019

Ratioa

Panel B: 2003
ROA
ROE
RP
CR
D/E
AT
LA
OR/TR
OR/OE

Mean Difference

Significance (p-value)

Notes:
a
Ratio definitions are presented in Table 1.
Significant mean differences at 1% or 5% significance level are presented in bold type.
Cluster 1 includes municipalities that are located to prefectures all over Greece except for Attiki
and Thesalloniki prefectures.
Cluster 2 includes municipalities that are explicitly located in Attiki and Thesalloniki prefectures.

have not yet been defined. Our research provides useful insights in relation to
the information content of accrual accounting financial ratios for cross sectional
municipalities comparisons and the limitations of unconstrained benchmarking
in the public sector. Moreover, our conclusions can be used as a basis for
public economic policy decision-making. Thus, in contrast to the private sector

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291

paradigm where within sector comparisons is a commonplace practice, in the

municipalities environment comparisons can be performed only among similar
entities in terms of wealth and size.
The analysis conducted in this paper is based on the financial statements of 277
municipalities (497 municipal years) that have published their annual accrual
financial statements during the period 20022004. We used five macro-economic
factors namely GDP, population, real estate values, tourist development and
whether the municipality hosts the prefecture capital in order to assess the extent
of their influence on nine commonly used financial ratios. Our results support,
in general, our initial hypothesis that the assessment of financial performance
through traditional financial ratios is influenced by macro-economic factors.
Thus, our data provide corroborating evidence that the assessment of the
performance of municipalities on the basis of these commonly used ratios, in the
private sector, would not be an unbiased benchmark in the sense that macroeconomic factors succeed in revealing statistically significant relationships with
performance indicators. Our analysis revealed that the wealth of a municipality,
measured by the GPD, the price level of property and tourist development,
and its size, measured by its population, contribute to the cross sectional
differentiation of financial ratios. Moreover, the location of the municipality
in two of the most developed prefectures in Greece proved to have an effect
on the financial ratio values. As a consequence, univocally defined industry
benchmarks or norms in terms of financial characteristics for the entire national
municipalities population cannot be derived.
Nevertheless, wealth, size and location parameters would not be considered
as obstacles in order to assess alterations in the financial performance of a given
municipality over time. Macro-economic parameters do not change considerably
over a short period of time. Thus, no substantial effects on ratio values are
expected from year to year. In other words, the use of ratio analysis on a time
series basis could be conducted for any given municipality in a similar way as in
the private sector. On the contrary, ratio analysis suffers several shortcomings
when used in order to undertake cross-sectional comparisons due to the fact
that macro-economic factors exhibit influencing effects on the ratio values. This
does not mean that the use of financial ratio analysis is not suitable for the
public sector. On the contrary, in this paper we have identified possible areas
that should be taken into consideration by the policy makers in order to create
an assessment framework for financial performance measurement that would
encapsulate the idiosyncratic characteristics of municipalities. The outcome of
the framework could then be used as a support tool in relation to subsidies
allocation and growth and development oriented decisions.
Furthermore, the limitations identified from the analysis may serve as
starting points for policy amendment actions. The information content of
financial statements would be substantially improved with the inclusion of
demographic data and macro-economic information. Also, comparisons across
municipalities could be facilitated by the presentation of average, minimum, and

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maximum values in any given ratio and a qualitative assessment whether a given
municipality reflects favourable or unfavourable performance against desirable
outcomes. Finally, the financial performance of a municipality could be assessed
on a scale basis from very poor to very sound placed on a continuum where
intervals would correspond to specific ratio values. Moreover, the scale could be
different for small versus large municipalities, wealthy versus less affluent ones,
etc.
Finally, an issue that could provide a future research prospect is the analysis
of the impact of the new system of performance measurement and assessment
on actual financial condition improvement. The proposed performance measurement and assessment system discussed in the paper shares the characteristics
of a top-down system that is primarily oriented to accountability and control. It
remains to be proven whether such a system could serve as a vehicle to performance enhancement. Performance measurement in the public sector has tended
to be developed to provide legitimacy within an institutional environment rather
than to inform organizational change and service improvement.
As an epilogue, we could conclude that our survey is aligned to the broad
literature framework of assessing the usefulness of the application of private
sector methodologies in the public sector as described by the NPM regime and
contributes to the limitations faced during this transplant. The research findings
provide supportive evidence to the hypothesis that the assessment of public sector
entities on the basis of financial indicators is more complicated than expected
on the basis of private sector experience.
NOTES
1 Municipal Financial ratio analysis (www.moodys.com, accessed 31/7/2006).
2 According to our data 128 municipalities out of the 254 municipalities that had supplied MIPAD
with financial statements for 2003, published financial statements for the first time in 2003. Also
17 municipalities out of 129 that had published financial statements for 2004 published financial
statements for the first time in 2004. Moreover, an analysis of the data revealed that 61 out
of the total 277 municipalities that are included in our sample published financial statements
only for 2003. It is worth mentioning that financial statements for the whole three-year period
were available only for 25 municipalities in the sample.

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