Governing Reserves: Managerial Discretion and Government Creditworthiness

A government's ability to generate surpluses and build reserves reflects prudent financial management, with the accumulation of reserves signaling sound budgeting practices. Reserves are essential for sound fiscal governance during economic downturns, and managerial discretion over these resources is crucial to minimizing disruptions in service delivery. While the counter‐cyclical benefits of formal reserves are well documented, less attention has been paid to the discretion managers retain over reserves. Using credit ratings as a proxy for creditworthiness, we find that managerial discretion over accumulated resources enhances fiscal flexibility and strengthens creditworthiness; however, the presence of formal reserves alone does not improve credit ratings. Our study contributes to an emerging literature exploring whether better financial reporting can help us understand the critical balance between management flexibility and accountability mechanisms in public‐sector organizations.