A New Predictor of Local Financial Distress

Abstract

The development of predictive models for financial distress is a recurring topic in both private and public contexts, although currently its repercussions are greater in the public sphere, where efforts are being made to define new warning systems for fiscal crises. The present study thus aims first to show the similarities and differences between the absolute and relative models based on a 10-point scale, in order to subsequently combine the positive aspects of both proposals to find a system that can determine local fiscal distress in a more robust way. The results obtained show that the optimum predictive system is a slight variant of the model proposed by Kloha et al. (2005) Kloha, P. , Weissert, C. S. and Kleine, R. 2005. Developing and testing a composite model to predict local fiscal distress. Public Administration Review, 65(3): 313–323. [Crossref], [Web of Science ®] [Google Scholar] . This variant consists of the inclusion of two indicators of financial independence proposed by Zafra-Gómez et al. (2009a) Zafra-Gomez, J. S. , López-Hernández, A. M. and Hernández-Bastida, A. 2009a. Developing an alert system for local governments in financial crisis. Public Money & Management, 29(3): 175–82. [Taylor & Francis Online], [Web of Science ®] [Google Scholar] for which an alert threshold has been empirically determined.