DO INVESTORS CARE ABOUT MUNICIPAL DEBTORS' ACCESS TO BANKRUPTCY? EVIDENCE FROM BOND DISCLOSURES

A key question in the academic and policy debates over the optimal architecture for sovereign debt has long been whether sovereigns should be given access to bankruptcy or its contractual equivalent. One side of the debate cries moral hazard, saying that the cost of government borrowing will rise if...

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Bibliographic Details
Published in:The Fordham urban law journal 2023-04, Vol.50 (4), p.657
Main Authors: Gulati, Mitu, Schragger, Richard C
Format: Article
Language:English
Subjects:
Bankruptcy law
Disclosure (Securities law)
Evaluation
External debt relief
Hedge funds
Laws, regulations and rules
Municipal bonds
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Summary:A key question in the academic and policy debates over the optimal architecture for sovereign debt has long been whether sovereigns should be given access to bankruptcy or its contractual equivalent. One side of the debate cries moral hazard, saying that the cost of government borrowing will rise if governments have the option to access bankruptcy. Proponents of the other side see bankruptcy as a means to solve a coordination problem and reduce the cost of government borrowing. Using data on disclosures made by issuers of municipal bonds in the United States, this Article attempts to measure the extent to which investors care about access to bankruptcy as an indicator of the level of risk they face in lending. These findings suggest that investors care a lot less than academics and policy makers do.
ISSN:0199-4646