64 Pages Posted: 16 Jul 2011 Last revised: 13 Jan 2017
Date Written: October 7, 2016
In the $3.7 trillion U.S. state-and-local-government-bond market, greater issuance costs (lower issue-prices and greater underwriting fees) benefit financial institutions, while costing taxpayers. Campaign contributions by politically supportive underwriters can be associated with lower issuance costs. Alternatively, contributions can influence a politician to accept greater costs. This paper’s evidence suggests that contributions influence politicians: In the absence of an underwriter auction, underpricing increases with the chosen underwriter’s contributions relative to others. Moreover, the difference in the fees charged by contributing underwriters and those charged by non-contributing underwriters is 2.9%. In the presence of an underwriter auction, these results are statistically insignificant.
Keywords: Government Financial Management, Security Issuance, Underpricing, Campaign Contributions.
JEL Classification: H74, P16, G24
Suggested Citation: Suggested Citation
Brown, Craig, The Politics of Government Financial Management: Evidence from State Bonds (October 7, 2016). Paolo Baffi Centre Research Paper No. 2011-102. Available at SSRN: https://ssrn.com/abstract=1885301 or http://dx.doi.org/10.2139/ssrn.1885301