Fractionalization and the Municipal Bond Market

43 Pages Posted: 18 May 2011 Last revised: 21 Jun 2011

See all articles by Daniel Bergstresser

Daniel Bergstresser

Brandeis International Business School

Randolph B. Cohen

Harvard Business School - Finance Unit

Siddharth Bhaskar Shenai

Harvard Business School

Date Written: May 17, 2011

Abstract

We study the impact of ethnic and religious fractionalization on the U.S. municipal debt market, and find that issuers from more ethnically and religiously fractionalized counties pay higher yields on their municipal debt. A two standard deviation increase in religious fractionalization is associated with a six basis point increase in bond yields, and a two standard deviation increase in ethnic fractionalization is associated with a ten basis point increase. To provide a scale for these results, a four-notch rating change, from AAA to AA-, is associated with an eight basis point increase in yields. Additional analysis suggests that at least some of this effect is not driven by the risk of the bonds, but instead reflects inefficiency in the underwriting process.

Keywords: Fractionalization, municipal bonds

JEL Classification: H74

Suggested Citation

Bergstresser, Daniel B. and Cohen, Randolph B. and Shenai, Siddharth Bhaskar, Fractionalization and the Municipal Bond Market (May 17, 2011). Harvard Business School Finance Working Paper No. 1844685. Available at SSRN: https://ssrn.com/abstract=1844685 or http://dx.doi.org/10.2139/ssrn.1844685

Daniel B. Bergstresser (Contact Author)

Brandeis International Business School ( email )

Waltham, MA 02454
United States
6174162324 (Phone)

Randolph B. Cohen

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-6674 (Phone)
617-496-6592 (Fax)

Siddharth Bhaskar Shenai

Harvard Business School ( email )

Soldiers Field Road
Morgan 270C
Boston, MA 02163
United States

Register to save articles to
your library

Register

Paper statistics

Downloads
309
Abstract Views
2,195
rank
99,999
PlumX Metrics