The use of accounting variables for the construction of logit and probit estimates of financial risk in Italian local Governments: an empirical application

With the activation of fiscal federalism in Italy it has become an urgent matter to assess the risks of local authority insolvency and to find the appropriate tools to do this. In other word the fiscal federalism has led to a growing interest in local government bankruptcy prediction models. In this context the present research proposes to model the risk of local authorities’ insolvency on the basis of accounting variables. The purpose of this research is to test the usefulness of financial data for predicting local government failure in Italy. After a brief literature review on predictive model of failure the study will then go on to focus on the main drivers of fiscal risk and their effects in accounting terms. The aim of this phase of the research is to identify the variables to be then used as explanatory variables in the quantitative models for estimating or predicting insolvency. The predictive models are an application of regression models that assess the likelihood of the occurrence of an event. From the various models in the literature identifying financial crises, type of regression model with a binary dependent variable: it includes the logit and probit regression model. These are non linear models that use standard or logistic distribution functions. The explanatory variables of the model are the accounting variables identified in the first phase of the work. Once constructed on a theoretical basis, the model will then be tested empirically on a sample of local bodies in Italy.