The Financial Distress of Public Sector Entities: Evidence from Italian Public Universities

Abstract

The paper investigates the financial condition of Italian universities, focusing on cash- and budget-level solvency as well as service-level solvency. Our model includes structural factors (which refer to both size and quality in structures), organisational factors (which refer to the performance evaluation of the strategic mission of universities, such as research and teaching activities as well as the so-called third mission) and hybrid factors (which essentially refer to the financial relationship between the central government and each university). Basing the analysis on these factors, we propose a model for evaluating the financial viability of Italian universities, characterised by high flexibility and feasibility. We found that neither structural nor organisational factors seem to affect financial distress, with only the hybrid factors being significant. These results are probably due to the troubled financial difficulties that are affecting several countries in current years; this means that central government is forced to pay attention only to the financial factors. Furthermore, our findings suggest that performance-funding policies can be ineffective if there is not a clear understanding of the mechanisms through which accountability operates.