Does Financial Slack Reduce Municipal Short‐Term Borrowing?

Many municipal governments face the challenge of temporary cash deficits due to the mismatched schedules of cash flow†ins and flow†outs. To smooth the temporary deficits, they can use either internal financial resources such as financial slack or external financial resources such as short†term borrowing. This paper applies the pecking order theory to examine municipal governments' financial preference when they experience cash flow problems. Results show that municipal governments prefer accumulated financial slack to short†term borrowing when both options are available. This finding demonstrates financial slack's role as a convenient cash management tool in municipal financial management. It also suggests the applicability of the pecking order theory in future public financial management research.