Corruption, Political Connections, and Municipal Finance

Butler, Alexander W.; Fauver, Larry; Mortal, Sandra

doi:hhp010

Corruption, Political Connections, and Municipal Finance

The Review of Financial Studies, Vol. 22, Issue 7, pp. 2673-2705, 2009

Posted: 22 Jun 2009

See all articles by Alexander W. Butler

Alexander W. Butler

Rice University - Jesse H. Jones Graduate School of Business

Larry Fauver

University of Tennessee, Knoxville - Department of Finance; University of Tennessee

Sandra Mortal

University of Alabama - Culverhouse College of Commerce & Business Administration

There are 2 versions of this paper

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

Butler, Alexander W. and Fauver, Larry and Mortal, Sandra, Corruption, Political Connections, and Municipal Finance (July 2009). The Review of Financial Studies, Vol. 22, Issue 7, pp. 2673-2705, 2009. Available at SSRN: https://ssrn.com/abstract=1422414 or http://dx.doi.org/hhp010