Financial risk : charter school-specific risk factors and idiosyncratic risk

Hinojosa, Luis Paul
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The literature lacked resources or frameworks for identifying and managing charter school-specific risk (CSSR) factors that could affect the investors’ risk perceptions in K-12 education. This study aimed to evaluate how CSSR factors and idiosyncratic risk predict the perceived credit risk of an open enrollment public charter school and the resulting investment risk premiums required by potential investors. The correlational research design included all Texas open enrollment charter schools with municipal education revenue bonds. The analysis included two phases. Phase 1 involved performing simple linear regression modeling to understand the unique contribution of predictor variables to explain the investment risk premium. The significant predictor variables were identified in Phase 1. Phase 2 involved applying multiple linear regression modeling to determine the optimal set of predictor variables influencing investment risk premium. Phase 1 yielded a finding that participation in the Texas Bond Guarantee Program explained 66.7% of the variability in the investment risk premium in each Texas municipal education revenue bond transaction since 2019. On a standalone basis, the CSSR Factor 11 of unrestricted net assets explained 45.5% of the variability in the investment risk premium. In Phase 2, the multivariate linear regression modeling indicated that the predictive power of CSSR Factors 2 through 12 diminished significantly when the TPSF guaranteed a municipal revenue education bond transaction. The addition of a debt guarantee introduced a factor, or possibly factors, outside of the idiosyncratic CSSR factors associated with each municipal education revenue bond issuance. Due to the addition of the TPSF guarantee, the explanatory or predictive power of the CSSR factors diminished from 60.8% to 19.5%. Additionally, a combination of CSSR factors was determined to explain 60.8% of the variability in the investment risk premium. This empirically based understanding of financial risk based on how CSSR factors impact risk perception of open enrollment public charter schools could benefit the efficiency of free public schools. In addition, the state of Texas could benefit from individual public charter schools proactively and deliberately understanding and managing their CSSR factors and idiosyncratic risk. Further recommendations appear in Chapter 5.