Corruption, Political Connections, and Municipal Finance

We show that state corruption and political connections have strong effects on municipal bond sales and underwriting. Higher state corruption is associated with greater credit risk and higher bond yields. Corrupt states can eliminate the corruption yield penalty by purchasing credit enhancements. Un...

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Bibliographic Details
Published in:The Review of financial studies 2009-07, Vol.22 (7), p.2873-2905
Main Authors: Butler, Alexander W., Fauver, Larry, Mortal, Sandra
Format: Article
Language:English
Subjects:
Bond issues
Bond markets
Bond rating
Bond ratings
Campaign contributions
Corruption
Corruption in government
Credit
Credit ratings
Credit risk
Default
Economic growth
Fees & charges
Financing methods
Government
Government bonds
Government corruption
Influence
Insurance companies
Insurance underwriting
Local finance
Local government
Municipal bonds
Municipal finance
Political behavior
Political corruption
Political economy
Regression coefficients
Studies
Treasuries
Underwriting
Yield
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Summary:We show that state corruption and political connections have strong effects on municipal bond sales and underwriting. Higher state corruption is associated with greater credit risk and higher bond yields. Corrupt states can eliminate the corruption yield penalty by purchasing credit enhancements. Underwriting fees were significantly higher during an era when underwriters made political contributions to win underwriting business. This pay-toplay underwriting fee premium exists only for negotiated bid bonds where underwriting business can be allocated on the basis of political favoritism. Overall, our results show a strong impact of corruption and political connections on financial market outcomes.
ISSN:0893-9454
1465-7368
DOI:10.1093/rfs/hhp010