Corruption and Municipal Finance
Alexander W. Butler
Rice University - Jesse H. Jones Graduate School of Business
November 28, 2004
I examine the effect that state-level public corruption has on municipal financing activities in the United States. Corruption has a strong adverse impact on total bond issuance costs and state debt ratings, but not on individual bonds' ratings. This is because corrupt states are more likely to use institutional means to partially mitigate the negative effects of corruption. Strikingly, the impact that corruption has on issuance costs vanishes for credit-enhanced bonds and for locally underwritten bonds, but not for bonds underwritten by high reputation investment banks. These results are useful for understanding the costs of corruption and how institutions can attenuate corruption's negative effects.
Number of Pages in PDF File: 40
Keywords: Municipal bonds, corruption, certification, bond insurance
JEL Classification: H74, G24, K42
Date posted: August 16, 2004 ; Last revised: August 26, 2008
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