Corruption, Political Connections, and Municipal Finance

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

Multiple version iconThere 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

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

Alexander W. Butler (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

MS 531
Houston, TX 77005
United States
713-348-6341 (Phone)

HOME PAGE: http://www.owlnet.rice.edu/~awbutler/

Larry Fauver

University of Tennessee, Knoxville - Department of Finance ( email )

424 Stokely Management Center
Knoxville, TN 37996
United States

University of Tennessee ( email )

424 Stokely Management Center
Department of Finance
Knoxville, TN 37996-0540
United States
865-974-1722 (Phone)
865-974-1716 (Fax)

Sandra Mortal

University of Alabama - Culverhouse College of Commerce & Business Administration ( email )

Culverhouse College of Business
Tuscaloosa, AL 35487-0223
United States

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