Corruption, Political Connections, and Municipal Finance
Posted: 22 Jun 2009
There are 2 versions of this paper
Corruption, Political Connections, and Municipal Finance
Date Written: July 2009
Abstract
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-to-play 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.
Keywords: D73, G20, G22, G24, H74
Suggested Citation: Suggested Citation
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